6th March 2013
There may be emerging grounds for optimism about the Greek economy according to J.P. Morgan Asset Management. In a note to investors, Maria Paola Toschi & Tom Elliott, global strategists at the fund manager say the country may be on a bumpy road to recovery.
It says that this is important for the global re-risking investment theme. It says: “If Greece can present itself as a recovering economy, having taken the Troika’s medicine of fiscal austerity and supply-side reform, the reform agenda of the European Central Bank (ECB) and International Monetary Fund (IMF) will be given a further boost. If Greece stumbles, the vested interests in other peripheral eurozone nations will be encouraged to delay supply-side changes and with it growth and debt sustainability.”
The strategists point out various grounds for optimism. It says in January, the Greek Government won a highly symbolic battle against Athens Metro workers over pay scales. It adds: “Disruptions and strikes persist, but the government has an important victory under its belt.”
The note says that despite the economy entering its sixth year of recession, the Foundation of Economic and Industrial Research consumer confidence index is near a two-year high. It points out that three Greek companies, OTE, Fage and Titan, have been able to issue debt on capital markets in recent months while the government is forecast to run a primary budget surplus this year and a return to GDP growth is expected in 2014.
The analysts add: “This has allowed Greece to join in the ‘risk-on’ rally of recent months. Greek ten-year government bond yields have dropped below 10 per cent, while the Athens Stock Exchange (ASE) main index has rebounded by roughly 10 per cent year to date, and more than 100 per cent since June 2012. Standard and Poor’s has upgraded Greece’s credit rating to B-minus, with a stable outlook. Commentators are no longer predicting Greece’s imminent exit from the euro.”
It is not all good news. J.P. Morgan notes that the labour market remains weak. At the end of 2012 the unemployment rate climbed to 24 per cent, which, it says, clearly hinders the restoration of domestic demand.
It adds: “Average unit labour costs have declined 14 per cent since the 2009 peak. The effect of this, together with weak domestic demand, has been a steady improvement in the current account deficit, which fell to 5 per cent in September 2012, from 16 per cent in 2009. Tackling the persistent current account deficit is key to long-term growth, and to debt sustainability, so this is welcome news.”
The note continues: “It is not only the Athens metro workers who are being asked to reform. The Troika has made quite granular recommendations, which include specific headcount reductions in the civil service, and improving the efficiency of court proceedings.
“Supply-side reforms also include the liberalisation of regulated professions, much of the retail sector and of tourism. Steps have been made to assess tax evasion, and clarify land ownership. The potential revenue to be gained is substantial: estimates suggest current annual tax revenue losses are in the region of EUR 30 billion.
“Privatisations have not yet been started. However, the government recently presented a list of state-owned companies, golden shares (mainly in utilities) and properties to sell. On the downside, proceeds from these privatisation initiatives may only amount to EUR 23.5 billion through 2020, half of what was initially projected.”
The note adds that bank recapitalisations should be finalised by the end of April 2013. Total capital needs are estimated at EUR 40.5 billion, of which EUR 27.5 billion corresponds to the four biggest domestic lenders. Private shareholders should cover at least 10 per cent of new common equity capital to ensure the credit institutions are privately run, it says.
The note points out that after a long period of a decline in banking deposits, deposits started to recover in the second half of 2012 and inflows also came from abroad. “The successful conclusion of the government bond buyback programme, at the end of 2012, has helped to make debt-to-GDP targets, set by the Troika, achievable goals. To date, 80 measures of spending cuts have been identified, with the majority of savings coming from public wages and social spending. The 2010 pension reform should reduce public pension spending as a percentage of GDP from 17 per cent to 14 per cent in 2013.”
*Sources: ECB Monthly Bulletin, January 2013, and IMF Country Report, January 2013.
The manager also argues that the contagion risk for Europe has declined. The note says: “Just as Greece is contributing to the broader ‘risk on’ environment, so the downside risk to its neighbours’ banking systems has been substantially reduced. Not only is Greece now less likely to leave the euro, which would have caused chaos among its trading partners, but the March 2012 restructuring of privately held Greek government debt has reduced a great deal of uncertainty over the real value of the bonds on banks’ balance sheets. Losses have been crystallised.”