Fixing the banks should be a priority
Kyriakos Mitsotakis, the new conservative prime minister, took office in Greece at what is perhaps the best moment since 2004. Unlike Italy, whose politics are dominated by the controversial Matteo Salvini, other eurozone countries and the UK striving with Brexit, Greece has a stable government and political system. It has also been recording consistently large primary budget surpluses for the first time in decades. All that is left to do is fix the banks to boost lending to the private sector to produce sustainable, high economic growth rates in the next few years. Notwithstanding other structural problems, such as red tape, one can hardly disagree with this view shared by a growing number of bankers and investors putting their money where their mouth is.
The Athens stock exchange is one of the best performing bourses in the world and Greek government bonds have been the top performers in the eurozone since the start of the year. By most accounts, the outperformance of local stocks and bonds has been partly fueled by sound public finances, a modestly growing economy and expectations that a New Democracy-led government would be elected and pursue a more business-friendly economic agenda.
“Greece has made a comeback. In 2014-15, its political system was in shambles but now it is more stable compared to Italy, the UK and other countries. Take a look at Salvini, [Jeremy] Corbyn or Boris Johnson,” said a former top banker who is now a partner in a fund specializing in bad loans. “One can also take a look at the political debate between the two main parties, SYRIZA and New Democracy, before the elections. Both were arguing about tax cuts.”
According to him and others, a growing number of foreign investors see the broader picture and this is why they have put their money on Greece. “They do not see Mitsotakis as possessing any magical power. They simply realize that [former German finance minister Wolfgang] Schaeuble was right. There is just one job left in Greece and that is to fix the banks,” said a senior banker.
In the near term, however, the new government will have to elaborate on its strategy of cutting taxes to lighten the burden on the middles class and businesses while addressing the projected shortfall in the fiscal target. The country committed in June 2018 to a primary surplus target of 3.5 percent of gross domestic product until 2022 in exchange for debt relief measures. However, the European Commission and the Bank of Greece estimate the primary surplus will turn out between 2.5 and 3 percent of GDP in 2019, following the previous government’s pre-election handouts.
The head of the European Stability Mechanism, Klaus Regling, and German Chancellor Angel Merkel have publicly opposed changing the fiscal targets which are linked to the sustainability of the public debt. Greece’s debt-to-GDP exceeds 180 percent but its gross financing needs are estimated at about 8 percent of GDP on average for the next 10 years by the International Monetary Fund compared to Italy’s 23 percent of GDP.
Still, mending the Greek banking sector to provide credit to the economy should be a priority. Pundits agree that without a well-functioning banking system, you cannot have enough investments to spur economic growth. This is more so since euro interest rates remain at low levels because of concerns about growth prospects and trade jitters.
Greece has to enter a virtuous lending cycle to achieve high economic growth rates. This means it should fix its banks to be able to provide loans by beefing up their capital adequacy ratios soon. Fiscal discipline coupled with credit growth could help the economy take off.
