Political risk may impair market access

Greece is preparing to exit its bailout program on August 20 after three rounds of financial assistance in 2010, 2012 and 2015, exceeding 300 billion euros in total. The country is betting that a debt relief plan by the Eurogroup and a large cash buffer along with the economy’s return to growth will boost investors’ confidence in Greece.

However, there’s always the risk that political risk will rear its head, which should not be underestimated.

In spring of 2014, investors lined up to buy Greece’s 5-year bond, the first issued since 2010. Greece raised 3 billion euros from the sale amid robust demand from international investors with bids reaching 20 billion euros. Investors thought the 4.95 percent yield compensated for the Greek risk and was attractive compared to its peers. It took them less than a year to find out they were wrong, as Greece came close to exiting the eurozone in July 2015.

The situation is different today. On June 22, the finance ministers of the eurozone countries agreed that Greece had completed the required policy measures under the last review of the third bailout program and gave the green light for the disbursement of 15 billion euros from the European Stability Mechanism (ESM) and a number of significant debt relief measures.

The news flow and ensuing ratings upgrades have had a positive impact on Greek bond yields and spreads. The benchmark 10-year bond yield fell to 3.84 percent in late July before rising close to 4.0 percent on the heels of the IMF’s report about the sustainability of the Greek debt and weakness in euro periphery bonds.

The general consensus wants the compression of Greek yields and spreads to continue as long as the country shows it is serious about growth and reforms and the international financial environment is benign. This may be true but one should not underestimate the ability of Greek ruling parties to disappoint by adopting inappropriate policy measures as the country heads toward elections. The next general election is due by October 2019.

In this regard, one should not rule out the possibility that the governing coalition of leftist SYRIZA and the right-wing Independent Greeks (ANEL) will not break with this Greek tradition despite the fact the country remains under post-program surveillance. Of course, this remains to be seen and deviations from agreed policies may not be large enough to upset the markets.

There is also the prospect of possible early elections. This could emanate from disagreements between SYRIZA and ANEL over a deal reached by Prime Minister Alexis Tsipras with the Former Yugoslav Republic of Macedonia on a new name for the country, North Macedonia. A possible government crisis may ensue when the agreement is presented to the Greek Parliament after the new name has been approved by a referendum in FYROM.

The dominant view wants possible risks from early elections to be contained. This is because the main conservative opposition party, New Democracy, which leads in the polls by a wide margin, is considered more business-friendly and committed to the implementation of reforms. Still, this doesn’t rule out uncertainty during the electoral campaign but its effect should be temporary.

However, the political situation may turn out to be more complex if Parliament does not vote a new president of the republic in the first few months of 2020. The candidate will have to get at least 180 votes in the 300-seat Parliament. Failure to elect a new president in late 2014 led to snap elections in January 2015 that brought SYRIZA to power. Should this be the case again, the elections will likely lead to a hung parliament since they are going to be held under a new proportional representation law.

All in all, Greece’s refinancing risk may be negligible in the next few years and relatively low to modest until 2033, assuming all debt relief measures are applied. However, it would be unwise to be complacent about the political risk given the country’s history. 

* Dimitris Kontogiannis ([email protected]) holds a PhD in macroeconomics and international finance. He has written and reported for Reuters, The Financial Times and Kathimerini English Edition, among others. He is currently working for public broadcaster ERT.