Greece’s Repeat Sisyphean Tasks
Greek shares remained at the bottom of Emerging Europe, with the debt yield curve inverted with 10 percent short-term rates, as Prime Minister Tsipras won re-election with his Syriza party and its main ally controlling the same bare parliamentary majority. The result was a surprise to the extent that the conservative New Democrats who were in charge before January surged late in opinion surveys seeming to put them in striking distance, but the actual victory margin was again decisive. The far-right Golden Dawn bolstered support on islands absorbing Middle East refugees with its anti-immigration stance. The once-dominant center-left Pasok was relegated to a handful of seats, and Syriza’s breakaway wing did not manage to change the political equation as it girds for immediate fights on EU bailout plan implementation. The Finance Minister who succeeded the fiery academic Varoufakis will stay on, as the latter sustained controversy during the campaign with comments that “a 10-year old with math skills” would recognize austerity cannot overcome unsustainable debt. S&P reaffirmed the CCC+ stable rating with the outcome as it reduced Grexit odds to 33 percent. Eurogroup chief Dijsslebloem insisted the EUR 80 billion package will not be renegotiated as the Stability Mechanism admitted to a privately placed bridge loan in July to finance the poll period.
GDP growth was positive in Q2 at almost 1 percent, although industrial output and retail sales were down and deflation persisted. Tourism arrivals increased 20 percent on an annual basis, but trade and fixed investment continue to slump and consumption improved as a blip in advance of capital controls. Privatization will again miss the EUR 1.5 billion target, and the property market is among the five worst in the world according to industry experts with official unemployment stuck at 25 percent. Bank credit ratings were slashed to “C” with non-performing loans at 40 percent by the latest tally as European supervisors conduct their own asset review around the estimated EUR 25 billion recapitalization program. Emergency liquidity assistance was EUR 90 billion as of the election call and deposit outflows were EUR 300 million in August. Senior bondholders could face haircuts under new rules but the exact classification and loss formula may not be determined for months as examiners sort out the books and consult with the new pan-EU regulatory authority. Complicating the assessment is the lingering Agricultural Bank scandal, with thousands of alleged illegal loans over a decade and over EUR 5 billion never recovered. A central “bad bank” as in Spain is still under consideration, as the four remaining groups also seek relief through eventual government bond-buying under the ECB’s quantitative easing if small amounts are eligible.
The IMF has yet to sign up for Greece’s latest arrangement while endorsing Cyprus’ progress with release of another installment despite the sticky 50 percent-plus NPL ratio. Portuguese share direction awaits the result of the upcoming close contest between the ruling coalition and opposition Socialists, with anti-austerity parties possibly uniting with the latter to put them over the top. Economic growth is 1.5 percent on 12 percent unemployment, and consumer credit continues to lift household spending even as the Novo Banco sale to Chinese bidders became uncorked.
