Saturday, November 4, 2017

Greek Debt Basics: Part III - The Dawn Of Realism

We last left Greek Prime Minister Alexis Tsipras in the summer of 2015 as he graduated from Reality Kindergarten.  It would take him roughly two more years to get through Economics For Dummies.

Mr. Tsipras is far from being a dummy, of course. In fact, he is quite intelligent and more than capable of passing the litmus test of all politicians: changing his mind and tactical direction when necessary.  The first sign came with the about face he performed immediately after the 2015 referendum.  He summarily fired his flamboyantly incompetent Finance Minister, who came within an inch of tossing Greece into the Grexit abyss, and formed a new, more mainstream government. Fiscal policy was tightened with cuts in pension outlays and increases in VAT, excise and social security taxes.

He still made mistakes, of course.  In late 2016 public finances showed a significant overshoot in primary budget surplus, so he decided to distribute a one-time bonus to lower income pensioners.  He had not previously cleared his decision with the Troika, however, and the resulting spat threatened to derail the entire bailout program. After a few days of heated exchanges, the government submitted a letter promising to refrain from such unilateral actions in the future.

Matters quieted down in 2017 as the economy started to show early signs of a tepid recovery. Tourism, Greece's economic mainstay, was boosted when Turkey became a much less desirable destination for Westerners, particularly Germans.  As the year progressed, Mr. Tsipras finally realized that economic growth could only come from a marked increase in foreign direct investment, so his political rhetoric became business friendly and he made several high profiloe visits to leading businesses. Furthermore, he mended relations with the Troika and put the bailout program's evaluation schedule back on track.

A new 3-year government bond was successfully offered and met with strong demand from foreign institutional investors.  Yields have now come down significantly in the secondary market, with the benchmark 10-year GGB now trading at 5.10%, the lowest since late 2009.

Ten Year Greek Government Bond YTM

Five year Credit Default Swaps have also come down fast, now at 450 bp.

Five Year Sovereign Greek Credit Default Swap

The government's obvious plan is to continue the path of fiscal rectitude and thus regain the market's confidence. Several new bond issues are planned for the immediate future, to demonstrate regular access to markets for debt refinancing. The aim is to achieve a "clean" exit from the onerous bailout program in August 2018.

Since parliamentary elections are due no later than September 2019, Mr. Tsipra's political strategy is to a) achieve measurable economic growth and reduced unemployment and b) exit the bailout program with some form of debt relief.  For my money, I think he will succeed in both, albeit in somewhat less than spectacular fashion.

In the next installment I will look at where economic fundamentals stand now and start digging into the country's banking sector.


  1. There is a flaw with your analysis.

    Greek pensioners paid the state in the past for their pensions

    Greek workers paid the state in the past for their pensions

    They are owed pensions, and its another debt.

    The Greek state spent the contributions so it has no assets, just that massive debt to pay.

    Look at Greek state spending. For every Euro going on the debts, nine go on the pensions.

    Omitting the debts and just talking about what is owed to the bankers plays into the hands of politicians and bankers who will screw the Greek public even more.

  2. With all due respect Lord Blagger, I haven’t done any analysis so far in this series, just presented facts and data. So there can be no “flaw in my analysis”.

    Nevertheless, be patient.. I’m sure that in a few days you will have plenty of opportunity to find flaws :)))


  3. I agree with the two conclusions at the end and generally speaking with the description of events.