Beware of Greeks bearing gifts is an allusion to the story of the wooden horse of Troy, used by the Greeks to trick their way into the city but could this also be the case for the Greek government and its promises to its own people?
Greek markets were in the news again as Greek Government Bonds sold off aggressively on the back of softness in global equity and credit markets, risk aversion, increasing speculation of private debt restructuring (PSI) and news that Prime Minister Samaras plans for Greece to exit its IMF adjustment program more than a year early (currently scheduled to end in Q1 2016).
Yield on 10Y Greek Government Bond
What has the government achieved so far?
It is fair to say that a number of structural reforms have taken place which have seen a notable acceleration of product and service market liberalization where progress has lagged. The fiscal primary and external current account balances are in surplus and the government successfully placed a medium-term bond. In addition, unemployment (which is the highest in the EU) has declined slightly in the past few months.
Moreover, the Bank of Greece stated that three of four Greek lenders that took part in European Central Bank’s (ECB) comprehensive assessment have no capital shortfall under relevant dynamic balance sheet assumption as they successfully recapitalized. Following the stress test, the EU11.4 billion buffer in state-owned back recapitalization fund HFSF (Hellenic Financial Stability Fund) will not be used.
Although there are initial signs of economic stabilization, the Greek government needs to do more to areas such as structural, labor, public administration reforms, taxation and public debt which remains at approximately 174 percent of GDP. Is it therefore a good time for the Greek government to start talking of an early program exit?
The announcement of an early exit from the IMF program seems to be part of a strategy ahead of the presidential elections in February 2015. The ruling government needs to secure parliamentary approval (180 votes), in order to elect a new President. In the case that parliament is not secured, national elections are automatically triggered and the new parliament will elect a president with a single majority. The ruling coalition currently has 155 MPs, but hopes that their choice of presidential candidate will be supported by smaller parties and independent MPs by advocating an early program exit.
According to the latest polls, the main opposition (the left party of SYRIZA) is likely to be ahead in an election scenario, but unlikely to have the majority and therefore forced to form a coalition. SYRIZA is campaigning against the program and its reforms (which are unpopular with the public), but has shifted gradually to the center with less provocative statements and therefore will likely be open to negotiations.
To exit the IMF program, Greece has asked the following from Europe:
Exiting the program unlikely
According to the IMF’s fifth review published in June, Greece will face a financing gap of 12.6 billion euros in 2015. The IMF will provide 8.6 billion euros to Greece during 2015, which if cancelled will increase the total financing gap to approximately 21.2 billion. The government believes that this gap can be filled with the unused money from bank recapitalization recourses and market access.
Greece: State Government Financing Requirements and Sources, 2013–16
To try to exit the EU-IMF bailout will take time due to new negotiations, but most importantly recent market developments suggest that market access is not easy, and the rate at which the Greek government will borrow is much higher than that of its official creditors. It seems that at the moment politicians are offering a Trojan horse to the Greek people. But they should beware of austerity end gifts and focus on financial logic.