Ode on a Grecian Bond

Ode on a Grecian Bond

As comebacks go, it was pretty staggering: A little over two years after it defaulted in the world’s largest debt restructuring deal (which caused private sector bond holders to lose 75 percent of their investment), Greece finally returned to international markets on April 10. And it did so in style, by issuing a five-year, 3 billion euro bond with a yield of 4.95 percent that was oversubscribed seven times. For some in Greece and those watching from afar, last week offered the first tangible sign that Greece’s era of crisis and fiscal austerity is coming to an end. But the euphoria of this landmark event will have been lost on many Greeks whose lives have been mangled beyond recognition over the last few years. For them there is no sense that equilibrium is being restored.

It could be argued that there was a distinct symmetry to Greece’s recent return to international markets. The bond placement came almost four years to the day since the country last sold its debt and the looming crisis meant it struggled to attract capital despite an unsustainably high 6 percent interest rate. After that, investors decided a foundering Greek economy without a eurozone backstop was too much of a risk and yields soared. Being cast into the wilderness forced Greece to sign an unprecedented bailout agreement with the European Union and International Monetary Fund (IMF) in May 2010 that imposed demanding fiscal and reform targets.

Prime Minister Antonis Samaras, the conservative leader who heads the two-party coalition government, referred to the placement of the heavily oversubscribed bond as a "decisive step to exit the crisis." For Greece, it has all been about taking small steps out of the gloom after seeing almost a quarter of its economic output disappear since the recession began in the second half of 2008. Tapping the markets is just one part of the recovery process; the country’s next achievements are already visible on the horizon. The first signs of growth are expected later this year, supported by what is likely to be another record tourism season. After the summer the eurozone is due to launch discussions with Greece about easing its debt pile, which is currently around 175 percent of GDP.

The country’s prospects certainly seem brighter than even two years ago, when speculation about whether Greece would leave the euro added to political and social instability that threatened to drive it completely off the rails. A primary budget surplus was delivered in 2013 a year ahead of schedule — in one of the world’s most dramatic and hard-hitting fiscal adjustments that came mostly on the back of spending and wage cuts rather than higher tax revenues. Greece even produced a current account surplus — though the amount was slight, it was the first surplus since records started to be kept in 1948. In December, the Purchasing Managers Index (PMI) measuring manufacturing activity showed output rising for the first time in more than four years.

These are some of the factors that created the positive mood the center-right New Democracy and center-left Pasok administration decided to cash in on this week. Plans for a return to the bond market were first drawn up last year as Greece put the threat of a euro exit behind it, lined up economic growth in its sights, and saw its bond yields begin to drop significantly. "We are already surprising (lenders). I want us to go even further than that," Samaras said in May 2013 as he told business leaders a bond placement was in the cards for the first half of this year. Two other euro-area countries that had been bailed out — Portugal and Ireland — also returned to the markets in 2013, helping break the ice before Greece’s re-entry.

The Samaras administration argued that by issuing the bond and creating greater confidence it would also reduce the cost of its short-term borrowing. There was, though, a symbolic element to the process. Having secured the last major installment of its 240 billion euro E.U.-IMF bailouts, the Greek government wanted to make it clear it would not need a third loan package. So in other words, a return to bond markets was, in this sense for Greece, a gesture of fiscal sovereignty.

To be sure, it was an expensive gesture. Greece will have to pay more than 700 million euros in interest over the next five years for the April 10 bonds. It seems rash for Greece, which wound up in an economic mess because it took on debt it had no hope of paying back, to now borrow from the markets simply to show that it can. Even Finance Minister Yannis Stournaras had insisted, until a few days ago, that Greece did not need to borrow to cover its expenditure needs. He has yet to explain how the 3 billion euros raised on Thursday will be used. Given international investors’ appetite for high yields and the fact that interest rates on Greek T-bills had been falling anyway, it is possible that issuing a five-year bond now will not lead to a marked reduction in short-term borrowing costs. Opposition parties accused the government of returning to markets now to boost its chances in May’s local and European Parliament elections and to overshadow the recent resignation of cabinet secretary and close Samaras aide Panayiotis Baltakos after he was secretly filmed talking to Golden Dawn about a judicial probe into the neo-Nazi party’s alleged criminal activities.

The timing and logic of Greece’s return to the markets deserves more scrutiny, but the most detrimental effect of last week’s bond sale could be that it may obscure serious underlying structural problems.

There are concerns about whether Greece’s towering debt is sustainable and these will persist until there is a firm decision from the eurozone on debt reduction. It is not clear, though, when this decision will come and how substantial the relief will be. Even the optimistic forecasts for growth rates of around 4 percent of GDP over the next few years do not guarantee that Greece will be able to pay off its debt. Greece last experienced these growth rates during its first hope-filled years of euro membership a decade ago. This level of growth is also unlikely to be enough to have a palpable impact on the staggering unemployment rate, which eased slightly to 26.7 percent in January. The Labor Institute of Greece’s largest union, GSEE, estimates that at an annual growth rate of 3 to 4 percent of GDP it will take more than 20 years to create the roughly 1 million jobs lost since the crisis began. This will leave an awfully high proportion of Greeks dangling helplessly in economic purgatory for an unacceptably long time. Even now, less than 15 percent of some 1.3 million unemployed are eligible for benefits.

Six years of recession and Greece’s panic-stricken efforts since 2010 to meet the targets set by its lenders have to some extent dehumanized the crisis. It means that many people no longer flinch at the fact that a developed European economy has about 160 percent more people out of work than it did four years ago or that 3.5 million employed Greeks have to support more than 4.7 million who are unemployed or inactive. It also leads to dire social consequences being overlooked. For example, while Greece is being praised for its economic turnaround and a successful return to the markets, more than a third of its population is considered to be at risk of poverty or social exclusion — the fourth highest figure in the E.U.

The challenge for Greece now is to provide its unemployed, socially excluded, and even average households, which have seen disposable income plummet by about 30 percent, with new and better opportunities. For these people, Greece’s return to the markets is an afterthought. Their main interest is in jobs and respectable salaries, which are in high demand but short supply. Banks are still reluctant to lend to businesses after four years of credit contraction, exports are stagnant despite a substantial internal devaluation, and investment in the real economy remains scarce.

Greek society will continue to be sorely tested for many years to come if there is a failure to restore the flow of liquidity to healthy businesses, get banks to lend to new entrepreneurs, and attract major investment that could create jobs on a large scale. The pressure, therefore, is on Greece’s decision-makers to come up with solutions that will improve people’s daily lives. Here too, though, there are complications. The government has seen its 29-seat majority in parliament reduced to just two since 2012. Last month, junior coalition partner Pasok by-passed a procedure that would have caused the ousting of two MPs who failed to support a package of reforms because this would have likely triggered the government’s collapse. The main opposition, radical leftist Syriza, has yet to provide a coherent alternative to the coalition’s austerity program. It looks set to win May’s elections but not by a convincing margin. Greece is not experiencing the political instability of previous years but it is certainly suffering from inertia.

What happened on April 10 is the result of a number of significant fiscal and economic achievements but this should not disguise fundamental weaknesses. These problems run much deeper and cannot be remedied just by raising capital from the markets. Until there is substantial job creation in the real economy and a serious move to alleviate social problems that are unprecedented for a eurozone member, we cannot speak of Greece having come full circle or of Greeks getting closure on the crisis.