Fresh obstacles on the road to recovery

The road to fiscal sovereignty for Greece is not a smooth one. Despite the government’s optimism and the helpful assurances of European officials, there has been no shortage of reminders of the challenges the country faces as it heads toward the post-memorandum era.

On March 5, the Hellenic Statistical Authority (ELSTAT) published its provisional data on growth in 2017, according to which gross domestic product increased by 1.4 percent. This was against a forecast of 2.7 percent in the budget bill passed in late 2016, and 1.6 percent estimated by the European Commission just two weeks earlier.

On the same day that ELSTAT delivered this unwelcome news, Europe was nursing a bad hangover from the Italian elections. Talks on the formation of a new Italian government will drag on, analysts believe, and are by no means guaranteed to succeed. Yet the voters’ message was crystal-clear: It was a triumph of anti-European populism, with the Five Star Movement as the clear frontrunner and the xenophobic League emerging as the biggest party on the right of the political spectrum.

The hostility that both these parties have expressed toward the euro and the barrage of pre-election pledges of new benefits and major tax breaks raise the likelihood of significant tensions between Rome and Brussels in the months ahead. Instead of becoming part of the solution, Italy has become an even bigger part of the European problem.

The markets’ initial reaction to the election results has been calm. But protracted uncertainty may increase nervousness among investors holding certain classes of European government bonds.

According to Blaise Antin, head of emerging markets at the American TCW fund (managing capital of more than $200 billion), in a negative scenario in Italian politics “Greece and other eurozone periphery countries would likely come under some initial pressure.” He adds that it’s hard to make more specific predictions at this point.

At the same time, the prospect of the European Central Bank tapering its bond buyback program (QE) as of September removes yet another vital layer of protection from Southern European bonds, especially those of Italy and Greece. Nor, of course, can we underestimate the effect of possible turbulence from the expected rate hikes by the US Federal Reserve, or a trade war.

January’s seven-year bond was “poorly timed” by Athens, Antin says, arguing that its travails since “ought to reinforce the need for a Greek precautionary program post-August [when the bailout expires].”

Referring to the large proportion of the recent issue – around one-third – that ended up in the hands of hedge funds, many of which dumped the bonds as fast as possible, Antin notes, “the difficulties with the new bond show that it will be more complicated and expensive for Greece to build the cash reserve it needs without more clarity regarding the post-August landscape and the shape and extent of debt relief measures.”

Amid this increasingly complicated international environment, the government appears to be undermining its own message that Greece has changed and is now safe for investment. A new law passed this month granting permanent status to fixed-contract state workers hired after November 2016 illustrates the enduring allure of the clientelist mentality.

Meanwhile, the appointment of Frangiskos Koutentakis, a Crete University lecturer, former aide to Prime Minister Alexis Tsipras and general secretary of Fiscal Policy, as chief coordinator of the Parliament’s Budget Office is yet another sign of Tsipras’s aversion to checks and balances.

The politicization of the state and the lack of tolerance for criticism are by no means new phenomena, but they have assumed worrying proportions, as the governing coalition seeks to control every independent voice, in its belief that while it may be in office, it is still not in power.

For foreign investors, the law facilitating clientelist hirings and the decision to effectively gag the body whose role it is to conduct an independent assessment of economic policy are signs that come September, the bad old habits will return with a vengeance.