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Greece’s future remains bleak


Good News: The deficit, bond yields and bank dependence on emergency financial support are all falling.

Bad News: Further painful reforms are needed, GDP is falling, political stability is modest, and the debt burden is growing.

Greece is finally issuing some positive economic data. It has developed a modicum of political stability. There are even overseas investors negotiating to buy national assets. So can we finally stop worrying, lie back and crack open the Ouzo? No.

While there are some positive developments, the poisonous combination of a flawed economic structure, social pain, growing debt to international creditors and political vulnerability remain.

The Good News

Thanks to a judicial adjustment of position (or a humiliating U-turn depending on your point of view), the Greek Prime Minister, Alexis Tsipras, has garnered a mandate to deliver some serious structural reforms. This has won Greece a further €86bn loan of bailout money (with strings attached) from the European Central Bank (ECB), International Monetary Fund and the European Union (EU), the “Troika” as it has become known.

This combination of stability and reform has helped to return some confidence among investors and commentators about the prospects of the Greek economy, which is reflected in some of the numbers. The government deficit has fallen to €1.9bn for the reporting period of January to September 2015, from €2.3bn one year earlier. The reliance by Greek banks on Emergency Liquidity Assistance (provided by the Bank of Greece) fell from €85.3bn at end-July, to €84.0bn at end-August, to €82.4bn at end-September.

Even the Greek government 10-year bond yield is on a steadily falling trajectory, indicating that investors think that the Greek government is less of a risk and hence they are prepared to accept a lower interest payment to entice them to buy the bonds.

The Test

This is all very nicely timed in the lead up to the ECB running its ruler over the reforms, the economy and the Greek banks before releasing the next tranche of the €86bn. This test is due to take place in November and many commentators are expecting the ECB to release much, if not all, of the €25bn set aside to lend to the major Greek banks to “recapitalise” them, i.e. give them enough money to stay in business in the medium-term.

The Horrible Truth

And this is where it starts to look less rosy. Those “strings” mentioned earlier require that yet more reforms are pushed through parliament, and many of these reforms are deeply unpopular; increasing the retirement age, reducing pension payments, privatizing assets, opening up protected professions and, perhaps most unpopular of all, expanding the property tax that is already hated and has caused the government to back down once before.

And the ambitious privatisation programme, won’t bring in the money. Greece might be targeting €50bn of asset sales throughout the lifetime of the latest aid programme, but it’s only managed to achieve €3.5bn over the past five years, albeit with a further €3.5bn predicted for 2016. So, while helpful, those numbers need to increase radically if they are to make a notable dent in the national debt.

For Tsipras to maintain his modest parliamentary majority, things will need to improve fairly soon. But Greece owes official lenders around €240bn, about the same as its entire GDP in 2013. Since then the GDP has shrunk and is continuing to do so according to the World Bank.

So it has less money to handle a combination of growing debt, growing welfare need and growing social dissatisfaction.

What’s the Greek for "Hobson's choice"?

The Troika has managed to dilute the threat of other countries being damaged should Greece leave the euro. However, Greece itself faces a horrible dilemma: stay in the euro and continue to be economically choked, or leave the euro and attempt to rebuild the economy with fewer “handouts”.

The only way to defuse this situation might be a willingness from Greece’s creditors to write off a substantial amount of debt, but is the Northern half of the eurozone prepared to take some of its own medicine? From what we’ve seen so far, absolutely not.

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