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Abu Dhabi, UAEWednesday 24 April 2019

Greece recovery mired in challenges in its first post-bailout year

One of the biggest constraints on future growth is the ability of banks to provide credit to the real economy

A wall in Athens, Greece. Although the country’s economic recovery is gathering pace, it’s still rebounding from a devastating recession. AFP
A wall in Athens, Greece. Although the country’s economic recovery is gathering pace, it’s still rebounding from a devastating recession. AFP

After emerging from its steepest economic crisis in living memory, Greece still has a mountain to climb in 2019 if it’s to consummate its comeback with a sustained return to bond markets.

The government plans to issue as much as 7 billion euros (Dh29.22bn) of new debt this year, using part of its cash buffer to repay some International Monetary Fund loans early.

That’s going to be a tough ask. While the external market will continue to have a bearing - as it did last year when contagion from Italy helped prevent Greek government bond yields from dropping - Greece faces three main domestic risks in its first year since exiting its bailout.

Greece’s turnaround from fiscal basket case to a country that consistently posts budget surpluses has been the key factor letting it escape its bailout shackles. That’s now threatened by an activist judiciary, with the supreme court set to rule on the constitutionality of pension cuts legislated in 2013.

Added to the risk from the courts, politicians are once more making big promises as elections loom. Prime Minister Alexis Tsipras’s Syriza-led government has announced an expansionary program that includes 25,000 new public-sector hirings, while opposition New Democracy party leader Kyriakos Mitsotakis has promised an ambitious tax-cutting agenda.

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Although Greece’s economic recovery is gathering pace, with GDP growing 1 per cent in the third quarter, it’s still rebounding from a devastating recession. One of the biggest constraints on future growth is the ability of banks to provide credit to the real economy.

The government is working on an Italian-style model to help banks cut their non-performing exposures, which stood at 88.6 billion euros at the end of June.

There’s no shortage of initiatives to solve the problem. The Bank of Greece has submitted its own plan, which still needs to be approved by the government and could run in parallel with the finance ministry one. Still, bank shares linger near all-time lows, suggesting investors don’t believe they’ll avert the need to raise more capital.

A finance ministry spokeswoman was unavailable to comment on the NPE-reduction plans, while an official at the country’s debt management agency was unable to comment on the country’s bond-issuance plans.

Greece’s elections, which must happen by October at the latest, don’t just threaten the government’s finances.

Although there isn’t a bogeyman frightening investors in the opposition wings, as there was in 2015 with Syriza, a change to the electoral law means an inconclusive result now could usher in an prolonged period of political uncertainty. This election will be the last in which the party coming first gets 50 extra seats in the 300-member legislature.

While polls indicate Mr Mitsotakis’s party will win the election, they’re unclear whether he will get enough seats to form a majority or if he’ll need to put together a coalition. If he can’t command enough lawmakers to reinstate the seat bonus, parliamentary arithmetic will make it harder for any government to muster the votes to continue the bailout-era economic reform agenda.

Updated: January 3, 2019 11:32 AM

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