Markets are concerned
What do the markets see in Greece and what do they worry will happen here? It is known that the European Stability Mechanism (ESM), which holds the greatest part of the Greek debt, has given us a long grace period. We won’t pay any interest until 2033. Also, it is known that Greece will only start the uphill struggle of large repayments after 2043 – unfortunately, the younger generations will have to endure until 2060. Finally, and importantly, Greek bonds have a golden “sponsor” in the European Central Bank: It buys back whatever Greek bonds any bondholder decides to sell and zeroes out the country’s immediate risk.
And yet, the yield on the Greek 10-year bond has risen to 4.46%, up more than three percentage points since the start of the year and nearly a point and a half above where it stood about a month ago. This increase is not due to the general rise in interest rates internationally, but to reasons linked to Greece. This is evident in the fact that, in the last month, the yield of the Greek 10-year bond has been rising more than the yields of all other European bonds. The spread of the Greek 10-year paper versus the German equivalent rose to 2.525 points, with the French at 1.96, the Spanish at 1.39 points and so on. What’s wrong?
There are two new risks priced in by the markets and reflected in the increased yields of our bonds. One is not up to us. The other is caused by the political system of our country.
The first danger comes from the “hawks” at the ECB, who have taken the upper hand in Frankfurt. On top of the big hikes they’re imposing on bank interest rates (which, if continued, will drag Europe into a deep recession), they are now pushing to reverse quantitative easing and turn it into quantitative tightening. That is, the ECB, instead of buying back European bonds on the secondary market, could start selling what it already has in its portfolio – as the Federal Reserve does. Greece, the country which benefited the most from the repurchases, will suffer dramatic consequences from the reverse process. This risk is real.
The second is domestically produced and was recorded in the latest report by Moody’s – it is the political risk. In my opinion, it results from two components: One is that the government, with its policy of covering up the wiretapping scandal, on the one hand is limiting its chances of achieving a majority in next year’s elections (a critical percentage of liberal voters abhor deep-state practices like those covered up by the Greek intelligence service), on the other it destroyed any possible understanding for cooperation with the third most popular party. In a society used to bad governance it is easier to denigrate the issue, but even small shifts in votes are enough to make a significant impact on politics.
The second component of political risk is the rude and nasty awakening that awaits large segments of society immediately after the spring 2023 elections, when, whichever government is formed, will be forced to implement large and violent fiscal tightening. Failure to do so will derail the implementation of the budget and, with it, the path to investment grade status – to bring our bonds out of the junk category.
In order to achieve a primary surplus of 1% of GDP (from a 2% deficit this year and who knows how much it will increase after the prime minister’s announcements in Thessaloniki earlier this month), it is estimated that we will have to enforce a fiscal tightening of the order of 4-5% of GDP, in a year when GDP growth will be limited to 2.5%, compared to 5.5-6% this year. After two years of handing out 57 billion euros without strict and fair criteria that would boost growth, and after a long period of pre-election pandering, things will not be easy. Neither for social peace nor for political stability. And that’s why the markets are worried.
