Gov’t must regain trust of the markets

Prime Minister Antonis Samaras and his coalition government will have to navigate the Greek economy through rough waters in the next few months. Although politics may dominate during this period, the success of the endeavor depends on the premier’s ability to win back the support of his sole ally till a few months ago: the markets.

It is generally accepted that the last cabinet reshuffle, which took place after the European Parliament elections, failed to boost the coalition government’s standings in the eyes of the public and the financial markets, one of the country’s main funding sources. The inclusion of some populist ministers in the new cabinet failed to help the administration gain ground in opinion polls despite a very good tourism season.

Many attribute this development to the unpopular new property tax (ENFIA) and a barrage of income and other taxes that have hit households since August. Polsters agree ENFIA played a significant role in hurting the senior government partner, the conservative New Democracy party, in opinion polls. However, some contend the conservatives would have still slid, albeit at a slower pace, in the surveys even if ENFIA had not been introduced. By enacting ENFIA to replace another unpopular real estate tax collected through electricity bills and introduced by the center-left PASOK government in 2011, the conservatives unwisely took the blame upon themselves. The fact all opinion polls give leftist SYRIZA a comfortable lead, ranging from three to 11 percentage points over New Democracy, speaks volumes.

This lead, which some think will be difficult to reverse in the months ahead, may play a role in the crucial vote for a new president of the republic, scheduled for February. The solid lead is generally believed to better serve SYRIZA’s goal of holding early elections rather than the government’s attempt to gather 180 votes to elect a new president in the 300-seat parliament. This could change in the next three months, but market participants closely following these developments understandably think the political risk has grown.

The increased political uncertainty to a large extent explains the underperformance of Greek bonds vis-a-vis their southern European counterparts in the last few weeks. Government sources have tried to downplay the price action in the thin bond market, claiming a large foreign hedge fund was largely responsible for a good deal of the selling pressure. It is noted the five-year bond issued last April saw its yield climb above 5 percent at end-September, rising steadily from a low of 3.8 percent on September 5, according to trading data. The yield of the 10-year bond spiked to 6.69 percent at the end of last month from a low of 5.58 percent in early September. It settled at 6.476 percent on Friday.

Greek equities have also performed poorly. The benchmark of the Athens Stock Exchange has lost about 10 percent in the last month and is down 16 percent in the last three months. Heavyweight bank shares have exerted downward pressure on the benchmark stock index during this time span as market participants lightened their positions ahead of the ECB’s asset quality review (AQR) and stress tests. However, part of the selling pressure seems to be related to concerns about the political landscape and its potential economic fallout, according to analysts and brokers.

It is known the government’s grand plan to complete the ongoing review, exit the European adjustment program, kick out the troika and replace the remaining IMF funding depends on the country’s ability to borrow from the markets. Without market funding, the plan will not work. Although the markets are still showing some good will toward Greece, it is also clear that they are not the close ally to Premier Samaras that they used to be. The fact the government has had little to show on privatizations and other fronts since June has undermined markets’ confidence, according to bankers and fund managers.

The pickup in political uncertainty has made things worse since investors and speculators realize it will be more difficult for the current administration to pass some key reforms. In addition, the prospect of early elections next year and the potential economic fallout if there is no stable government, or a populist government, have dented sentiment.

In this regard, Samaras has a tough task ahead. He will have to regain markets’ confidence by deeds, not just words, to get them to finance Greece’s 2015 funding gap and likely IMF loans at reasonable interest rates and help local banks and companies raise fresh capital and liquidity in equity and debt markets. This year’s likely better-than-expected primary budget surplus for the third consecutive year and a positive GDP growth reading in the third quarter will help partly reassure markets.

However, he will need more good news to get them to support the government’s plan for disengagement from the EU and IMF programs. Some analysts and others think picking some winning fights, such as reforming the law concerning the privileges of trade union chiefs, could help win over the markets and the support of reformist-minded voters. Of course, this cannot erase concerns about politics but it could definitely help reassure markets to some extent.

The coalition government seems to be gradually losing ground in the polls and the confidence of its only ally, the markets, since June. If it wants to enhance its chances of a political comeback and disengage from the EU and IMF programs it will have to win back the confidence of the markets by delivering some key reforms and privatizations in addition to fiscal discipline and GDP growth.