The best that can
possibly be said for Greece right now is that the worst is probably over.
But that's purely from a macro-economic
point of view. The average Greek citizen, struggling under years of
astronomical unemployment rates and severe austerity measures imposed by the
euro zone hierarchy, might not share that view.
Huge budget deficits caused by a stagnant
economy and years of excessive spending on social programs and government
payrolls and pensions buried Greece in debt five years ago, leaving the
southern European nation unable to pay off its loans and unable to borrow more
money. With Greece teetering on the edge of financial collapse, a debt crisis
was triggered across Europe as other countries and major banking institutions
that held Greek debt pondered the fallout from a Greek default.
Two bailouts followed. The first worth 110 billion euros in 2010 and funded by the European Union, the International Monetary Fund and the European Central Bank -- the so-called euro zone Troika -- wasn't enough and Greece seemed fated to exit the zone, a situation European leaders desperately hoped to avoid. In 2012, a second bailout was negotiated worth 130 billion euros plus an agreement to write off more than 100 billion of Greece's private debts.
In exchange for the rescue, Greek leaders
reluctantly agreed to austerity measures that led to massive layoffs of
government workers, reduced wages and higher taxes. Now there are indications
that Greece's economy may have struck rock bottom and has nowhere to go but up.
"There are signs that after many years
of pain a recovery is on the horizon," said Marc Chandler, head of
currency strategy at Brown Brothers Harriman in New York. "Not a strong
recovery, but the difference between contracting and small growth is the
difference between night and day."
The International Monetary Fund offered a
real glimpse of hope earlier this month when it forecast Greece will experience
0.6% growth in 2014 after a six-year recession. That growth will rise to 2.9%
in 2015, according to the IMF, and then level off at 4% as the decade
progresses.
And foreign investment has picked up,
especially from international hedge funds with huge appetites for risk. Yields
on Greek government bonds have fallen to about 7.7%, down from more than 30% in
late 2011 and Greece's stock market rose 24% last year.
Just this week the Greek central government
in Athens announced it had achieved a budget surplus of 700 million euros last
year, excluding its massive debt load, ostensibly fulfilling a goal set by euro
zone fiscal policy makers in 2012 when the second of the two massive Greek bailouts
was approved.
If a
surplus could be achieved, the policy makers promised, Greece could explore
options for easing the payments on those bailouts possibly through lower
interest rates or, more likely, by extending the maturity of the loans to as
long as 50 years.
Potentially throwing a monkey wrench into
Greece's ongoing talks with euro zone officials, a Greek court on Wednesday
reportedly overturned mandated wage cuts to police and military required under
the terms of the bailout. If the ruling stands, it could add a 500 million
euros burden to the country's already fragile budget, according to Reuters.
Meanwhile, Greek Prime Minister Antonis Samaras predicted in his New Year's Day address that Greece would begin selling government bonds again this year after being shut out of credit markets for its inability to pay its debts.
"The vicious cycle ends in 2014. Greece
will return to the markets, it will start to become a normal country again. The
debt will be declared viable, without the need of loan agreements, without the
need to borrow money," he said.
Most analysts believe Samaras, who leads an
increasingly uneasy coalition in the Greek parliament, was being optimistic to
say the least. And given all of Greece's ongoing fiscal woes, these economic
grass shoots hardly present a glass half-full scenario. They're more like a few
drops landing in an empty glass.
"It is true that there are increasing
indications showing that the worst may be behind us. This doesn't mean that the
recession is over by any means. But the evidence suggests that the economy has
bottomed out," said Diego Iscaro, a Greek analyst with IHS Global Insight.
Digging deep into the numbers, Iscaro noted
that several short-term economic gauges, such as consumer confidence, some key
inflationary measures, third quarter export data and bond market conditions,
have all shown some improvement in recent months.
However, none of these indicators is likely
to have enough impact on Greece's GDP to make much of a dent in the country's
startlingly high 28% unemployment rate, arguably the biggest problem bedeviling
the nation.
"Even if GDP increases, growth is
unlikely to be strong enough to lead a significant improvement in labor market
conditions, and unemployment is seen remaining extremely elevated for an
extended period," Iscaro said.
Deflation has also emerged as a growing
concern. While lower prices would benefit hard-hit consumers in the short-term,
the fear is that Greece's economy could get trapped in a deflationary spiral in
which purchases are deferred under the assumption that prices will continue to
fall, squashing demand and slowing production -- another vicious cycle.
Deflation also increases the real value of
debt because while the price of goods may be falling the cost of paying back
long-term debt stays the same. That's a critical problem for Greece's
government as well as its citizens, both of which are deeply in debt.
Lastly, political instability threatens to
upend any forward momentum achieved since the bailouts were received and
austerity measures enacted.
Not surprisingly, support for the
Samaras-led government has weakened since it was formed in 2012 as the
population has suffered under austerity. At the same time support for the far
left SYRIZA party is growing due to that group's vocal opposition to the
belt-tightening measures imposed by euro zone fiscal leaders.
Not only could political instability make it
much harder for Greek officials to negotiate more favorable terms for paying
down their debt, it could also have a profound chilling effect in potential
bond investors should Greece reach that milestone this year.
(Source: foxbusiness.com)
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