Greek Government Worried About Its Survival

Antonis Samaras has a problem: just as the relatively tough austerity medicine Greece was forced to take seems to be beginning to bear some fruit (Greece is the one euro area country where nominal government spending has indeed declined significantly), his shaky coalition government may soon be stumbling over the country’s upcoming presidential election. The problem in a nutshell is that if Samaras fails to get his presidential candidate elected, new parliamentary elections would be triggered – and according to current polls, the coalition would lose against SYRIZA.

Greek government spending has declined significantly in nominal terms (though not as a percentage of GDP, as GDP has declined a lot) – click to enlarge.

SYRIZA as readers may recall, once was a smallish coalition of tiny left-wing parties to the left of the social democrats that didn’t really have a lot of electoral support. After the financial crisis and the bankruptcy of the Greek government, it quickly became the country’s largest party. SYRIZA is anti-bailout, whereby we are not quite sure what this stance actually entails. Presumably, a SYRIZA victory would mean a Greek exit from the euro, as Greece’s creditors would have to accept the country’s bankruptcy, and its banking system would lose the ECB’s support (since it would be instantly bankrupt, and hence no longer eligible to receive ECB funding). Moreover, tearing up the agreements with the “troika” would definitely lead to Greece being made into a pariah, so as to discourage others from following suit.

As Reuters reports:

“Four years after a messy descent into emergency funding to stave off bankruptcy, Greece’s government is trying to pull the plug on a deeply unpopular bailout program to secure its own survival.

Under growing pressure from anti-bailout leftists, Greek Prime Minister Antonis Samaras desperately needs a new narrative to get the backing of lawmakers in a crucial presidential vote next year and rally Greeks fed up with four years of austerity.

It is a gamble with high stakes for the Greek economy and Athens’ relations with its euro zone peers. Failure by Samaras to get his presidential nominee elected would trigger new polls that his anti-austerity rivals would almost certainly win.

[…]

Athens is calculating that declaring an end to the reviled bailout could be just the political game-changer it needs, with the end of bailout funding from the European Union in December offering a logical moment to seal the exit of the International Monetary Fund as well.

“It makes political sense, completely 100 percent,” a source familiar with the discussions said. “The IMF is not pushing to leave, the government is pushing for it.”

Pulling this off, however, will almost certainly require Athens to notch up rapid-fire successes on several fronts – a swift end to its current bailout review, securing debt relief and the backing of European partners for going it alone.

In addition, forgoing over 12 billion euros in IMF loans and finding its own financing, just two years after a sovereign debt restructuring, remains a risky bet.

“If Greece completes this review with the blessing of the troika, who say ‘Great, you’ve done a lot’, maybe gets debt relief and a monetary agreement with the EU, then the markets may say ‘That’s good’ and it can raise 10 billion over the next year,” the source said.

“It’s a plausible financing scenario but there are risks for a country with emerging market access,” the source added, referring to Greece’s still low credit ratings.

To this it should be noted that de facto, the Greek government remains as bankrupt as ever. An official government insolvency was only avoided by a mixture of bail-out funding, letting private creditors eat some losses (while not imposing any losses on the ECB’s holdings of Greek government bonds at the same time), and creative accounting.

Greek government debt as a percentage of GDP. The IMF is reportedly on the verge of declaring Greece’s public debtberg to be “sustainable” – click to enlarge.

Will It Work?

Samaras can probably count on getting all the help he needs from other governments in the euro area. The last thing any of them want is another Greek crisis, or rather, a resumption of the old crisis. Currently the markets are still giving the situation the benefit of the doubt, as there is a widespread conviction that Greece will be kept a member of the euro zone by hook or by crook. However, a little bit of doubt may be creeping in lately. Below is a weekly chart of Greece’s 10-year government bond yields that shows the big decline in yields on the new post-PSI bond issues after Mario Draghi issued his famous “whatever it takes” promise:

As this weekly chart shows, Greek government bond yields have declined a lot. The post-PSI bonds (PSI= haircut accepted by private creditors) initially saw their yield rise to nearly 32%, but then a big decline following Draghi’s “whatever it takes” promise was set into motion – click to enlarge.

However, when zooming in on the action in the daily chart in recent months, it looks as though yields may actually have bottomed. Note that given that Greek CPI remains in negative territory, this is by the far the highest real yield paid by any European government bond, so the nowadays ubiquitous yield chasers have been big buyers.

A zone of support has formed this year around the 5.5% level. At the moment it looks as though Greek government bond yields may be bottoming out – click to enlarge.

Here is a look at Greece’s CPI. Leaving aside that it measures something that is inherently not measurable, it can still be compared to the data of other euro area countries that are by and large following similar conventions of calculating CPI. There can be little doubt that prices and wages have declined in Greece.

Greece’s CPI rate of change has been in negative territory for some time – click to enlarge.

More from Reuters:

“Athens is largely gambling that the political risk of not attempting an exit outweighs the financial risk of failing.

Sentiment is finally turning in its favor: four years of austerity have produced a primary budget surplus, it has successfully tapped debt markets twice this year and its economy is set to grow in 2014 after a six-year recession.

European partners — busy with a crisis in Ukraine, a widening Middle East conflict and a stagnant euro zone economy — may well be willing to help Athens along to avoid upsetting the fragile pro-bailout political order in Greece.

In a sign of the change in mood, German Chancellor Angela Merkel on Tuesday praised Greece’s efforts and promised Berlin would “do everything it can” to support Athens.

[…]

But if the IMF were to leave at the end of the year after disbursing 3.5 billion euros due at the end of the current review, Athens would forego over 12 billion euros. The IMF has also estimated an additional funding shortfall of 12.6 billion euros starting in mid-2015, though Athens disputes that, saying it does not need additional money beyond the current bailout.

Part of the shortfall could be met from leftover funds worth over 11 billion euros held by Greece’s bank bailout fund – assuming European bank stress tests do not reveal major capital needs for Greek banks and EU authorities approved such a move.

After ending a four-year exile from debt markets this year with two bond issues that showed keen appetite for its higher-yield bonds, Athens is increasingly confident.

Debt relief talks due to start later this year on a package of lower interest rates and longer maturities may also help the IMF to declare that Greece’s debt – set to peak at 177 percent of GDP this year – is now sustainable.

Indeed in Berlin this week Samaras took pains to say an exit by the IMF would not be a “divorce” but rather, “a success”.

The essential point here is in fact the “keen appetite” of investors for the high-yielding bonds issued by the Greek government. If anything happens to upset the happy bubble in junk debt of all types, Samaras will have to opt for plan B, if there is a plan B. He doesn’t have a lot of time – it is enough time for a dislocation in bond markets to occur, but not enough to produce a sufficiently strong recovery in Greece’s economy that could increase the government’s popularity. Reuters summarizes the political risk:

“For Samaras, all this will have to happen before February or March next year when he needs the support of 180 deputies in the 300-seat parliament to push through his nominee for president.

He has only the support of 154 deputies from his New Democracy party and Socialist PASOK coalition partner, but a bailout exit could help lure some of the 24 independent lawmakers and perhaps even a small anti-bailout party.

The radical leftist Syriza party, which has 71 seats in parliament and won the EU elections in May on an anti-austerity platform, has pledged to block the government’s candidate.

Failure to elect a new president would require a general election, which Syriza would almost certainly win according to opinion polls that give it a 2 to 6 percentage point lead.

“The government is now playing all its cards in an effort to get the 180 deputies it needs … to stay in power,” said political analyst John Loulis. “But there is a sense of political instability and a government that is wearing out.”

It could well be that the market participants are increasingly worrying about the possibility that the coalition could be forced to face an election. Note that the recent weakness in European stock markets has has also tarnished the performance of the Athens General Index, which started to weaken already well before the major Euro-land indexes did:

Athens General Index – Beginning to look a bit wobbly after rising smartly off its 2012 lows – click to enlarge.

Greece’s Economy

There are good reasons to believe that the Greek economy may be on the verge of improving more noticeably than it has done hitherto. The main reason is that unit labor costs have fallen far more in Greece than anywhere else, especially relative to German unit labor costs. Spain and Ireland have also seen big declines in unit labor costs, but are still far from catching up with Germany.

The following chart is from a recent Morgan Stanley research report and shows the growth in exports in the crisis countries plus France, a well as the trend in their unit labor costs relative to Germany’s since the year 2000:

Exports and unit labor costs of euro area countries, indexed – in Greece, unit labor costs are about to catch up with the trend in Germany’s labor costs since 2000 – click to enlarge.

One problem is of course that Greece isn’t exactly an export powerhouse to begin with, so it is benefiting a bit less from this development than other countries. Even so, its exports have grown strongly and due to its tourism business, the current account balance has swung into positive territory, in spite of an ongoing trade deficit. There is of course nothing inherently bad about a trade deficit anyway, but for Greece’s government it is important to convince foreign investors it will be able to service its debt, and a current account surplus means there is one less thing for them to worry about.

Greece’s exports have grown considerably – click to enlarge.

The current account balance has improved markedly since the boom peaked in 2007/8. Note that there are seasonal variations that relate to the main tourism season – click to enlarge.

Sentiment in the manufacturing sector has also improved significantly from the trough at the peak of the crisis, and the manufacturing PMI has been oscillating around the 50 mark for much of this year. The improvement in economic conditions has however not been sufficient to dent the unemployment rate much, and this is the main problem for Samaras – unless the population at large sees its situation improve in a tangible way, SYRIZA is likely to continue to beat his governing coalition at the polls.

Manufacturing PMI is oscillating around the 50 mark, which is neither here nor there, but it is still a significant improvement from the situation in 2012 – click to enlarge.

Unemployment remains at an extremely high level, which is the governing coalition’s Achilles heel – click to enlarge.

There is one political trump that Samaras still holds though: according to surveys, the vast majority of Greeks wants to keep the euro. People still remember the time when the drachma eroded their savings with unwavering regularity and apparently, no-one is eager to return to it. The belief that one can inflate and devalue oneself to prosperity, so popular with today’s bien pensants, is evidently not shared by the Greek population.

Conclusion:

There can be little doubt that Antonis Samaras will be getting all the help he wants from the EU. He will no doubt need it, as the economy is unlikely to deliver a big enough improvement to strengthen his political position in time. However, that doesn’t mean that the risk of major political upheaval in Greece has gone away. Investors in Greek government bonds continue to be exposed to this risk, and one wonders whether current yields – high though they are compared to government bond yields elsewhere – can really compensate for this risk.

Antonis Samaras, wearing his almost perpetual scowl.

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