Greece’s Border Crossing Crevice

Greek stocks extended their 2015 cellar MSCI showing with another 20 percent drop in January with worsening pension and refugee pressures, despite a sovereign ratings upgrade to B-minus with a stable outlook on default escape despite the 170 percent debt/GDP level. As the troika launched its latest review expected to last several months, the IMF continued with a firmer fiscal line insisting on 15 percent retirement system cuts as well as higher employer contributions. The central bank predicts first half economic contraction but notes a halt to euro exit speculation as bank deposits rose 2 percent in December although retail sales and the manufacturing PMI are still falling. Credit remains stagnant with only a small increase to the state as business and retail demand slumps, with one-third of households unable to pay their income tax according to a recent survey. A new revenue authority head was appointed as the Transparency International ranking improved 10 places with evasion crackdown, but officials including the Economy Minister continue as targets of corruption and misrepresentation inquiries. Politics is again in the headlines with opinion polls giving the opposition New Democracy party the advantage under a fresh leader, and farmers erupted in mass protest against agricultural austerity policies. A modest 0.4 percent of GDP primary budget surplus was achieved last year, but roughly equals the additional forecast direct cost of the Mideast refugee crisis in the coming months, as arrivals exceeded 60, 000 in January despite harsher weather. German representatives have tied bailout approval to influx management and pressed for faster establishment of “hot spot” processing centers. Neighboring Macedonia, long embroiled in a diplomatic name dispute with Athens sealed its border leaving thousands more indefinitely stranded. Germany is likewise under fiscal and political strains from absorption with researchers estimating EUR 50 billion annual expense, and 40 percent in public opinion urging Chancellor Merkel to resign over the government’s asylum stance. Bowing to demands for tighter control, she struck a compromise with coalition partners in January to discourage family reunification and add the Maghreb region as an eligible return zone.

Cyprus is in the last phase of its EU-IMF program and will not draw on the EUR 2 billion still available, and also won praise for structural reforms by advancing a dozen spots in the World Bank’s Doing Business reference. It is grappling with pension rescue as a scheme was adopted to compensate funds for losses from the banking system collapse. Bad loans at the two surviving lenders are over 45 percent of the total with no reduction in sight, despite possible mortgage foreclosure action after passage of a new law. In Portugal two banks have been resolved with “little spillover” in Fitch Ratings view, but write-downs imposed on senior bondholders have been controversial. The Economy Minister also admitted the need for additional capital, which will have to come from private sources with government debt/GDP at 130 percent. The EU cited a “big difference” with the leftist coalition over budget progress, with 2015’s deficit above 4 percent, and warned of forthcoming fines and sanctions as a new president was elected with the power to dissolve parliament and the fading post-crisis stabilization formula.

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