Greece’s Peripheral Center Stage Worry

Greek stocks were at the MSCI bottom with a 30 percent loss and bond yields retraced to 8 percent on IMF-EU program exit muddle in the wake of the coalition’s meager confidence vote win and European second-tier credit jitters. Prime Minister Samaras insists on no extension although a Fund precautionary facility is possible as his party backers believe commercial bond market return is set and outstanding bank recapitalization needs can be covered by a remaining backstop and private share offerings. To boost popularity ahead of a crucial vote for president early next year he froze and cut several taxes with the primary budget surplus in hand and GDP growth positive for the first time since the crisis. Public sector employment was slashed 25 percent over the period and “Doing Business” rankings rose with modest privatization due to accelerate in a EUR 20 billion effort through end-decade. The current account is in surplus on tourism revival and reduced debt service although the gross number remains unsustainable at over 170 percent of GDP. Official holders have assumed almost 90 percent of the EUR 300 billion owed, with a maturity profile of 17 years at minimal interest. These partners and Germany in particular have resisted further relief and demand a monitoring process as the formal Troika checkups end. For them Portugal is a cautionary tale as graduation was  complicated by the Banco Espirito Santo collapse with public debt set to rise to 130 percent of GDP. Yields have not backed up in the same fashion but output slack will be huge over the near term as young workers have migrated to Brazil and Angola. Iberian commercial links with Spain could also backfire as a proposed Catalonia independence referendum is debated after Scotland’s UK breakaway attempt. Slovenia avoided a rescue and MSCI performance is negative as the effects of the large fiscal and banking system adjustments undertaken with EU cohesion funds are felt. Fifteen state-owned companies are due for divestment with a negligible record to date and the bad asset repository is off to a slow start despite its 10 percent of GDP size. The new Prime Minister is a political novice as his predecessor was rejected for a top Brussels post. Ties with Croatia still in recession are proving problematic as the government there scrambles to pass long overdue structural reforms to ease the debt burden, with pension and tax changes recently introduced.

Hungary’s equity market has dropped 20 percent despite progress in meeting EU budget deficit goals as the Commission otherwise criticizes anti-democratic practices which may increase with ruling party victories in local elections. Deflation has prompted loose monetary policy and central bank reserves will be drawn down for another round of foreign currency mortgage conversion to punish banks for “excess fees and rates.” Poland is off single digits as it surprised with a 50 basis point benchmark decline with exports and domestic consumption both quashed by sour Russia-Ukraine sentiment.