Is The Greek Glass Half Full Or Half Empty?

Is Greece finally emerging from the long, dark tunnel of economic, political and social woes? Is there light at the end of the proverbial tunnel? Or is that light merely another train thundering down the track about to crush whatever feeble hopes the long-suffering Greek people may have?

Opinions differ sharply. Some have taken heart from Greece’s recent successful heavily over-subscribed issue of €3 billion in long term bonds at less than 5%. To them, this signals a return of investor confidence and a just reward for the country’s economic reforms. They note that the primary budget surplus – a surplus before any interest payments – is forecast at 2.7% of gross domestic product this year and set to rise further next year. The current account is in balance and there is a glimmer of growth.

But others, notably Wolfgang Münchau of the FinancialTimes, are less sure. Münchau mentions some damaging statistics to show that Greece has barely begun to climb out of the very deep hole it has dug for itself. He uses data collected by Greek political economist Yanis Varoufakis to show the size of the task.

He notes that of 2.8 million Greek households, 2.3 million have tax debts they cannot pay. Youth unemployment stood at 60.3% in 2013. Bank loans to businesses are down sharply. Non-performing loans that the banks record reached 38% of total loans. One bank manager told me that several of his customers simply don’t acknowledge that their bank loans have to be repaid. And 3.5 million employed people in Greece have to support 4.7 million unemployed or inactive people. Perhaps most damaging is that the country’s long term debt amounts to about 175% of GDP.

“The Greek economy is not in recession. Nor is it recovering. It has collapsed,” Münchau says.

The only caveat I would add to this dismal list of numbers is that it doesn’t appear to reflect how much of the Greek economy has gone underground, i.e. how much activity is off the books, unrecorded. If Greece is anything like other emerging economies I have worked in, the amount of unrecorded activity increases sharply in times of trouble. In order to avoid onerous social payments and taxes people are paid off the books, cash is king, borrowing from friends, relatives and local loan sharks replaces bank borrowing.

Others,like Simon Nixon in The Wall StreetJournal are a bit more sanguine.

“Greece’s return to the bond markets last week was a symbolically important for the euro crisis,” he wrote. “For a country at the centre of the crisis to draw €20 billion of foreign demand for a five-year bond yield under 5% shows that the market now believes Greece will stay in the euro zone, that it won’t collapse into chaos and that any further debt relief will be provided by official rather private lenders. A year there were few takes for that bet.”

 PaulTaylor of Reuters cautions that Greece is a long way from being able to fund itself unassisted in the market. He suggests that one road to relieving the crippling burden of Greece’s long term debt is to extend the maturities from 30 to 50 years and reduce interest rates. Private sector banks have long practised this ‘extend and pretend’ policy by keeping bad loans on the books rather than classifying these loans as write-offs. Like Dickens’ Mr. Micawber they are hoping that ‘something will turn up.’ Whether Greece’s official creditors will go along with this gamesmanship is another matter altogether.

One point of agreement for all these assessments of Greece’s progress is the absolute need for to spur growth in the country by sweeping structural reforms to unblock the many obstacles to such growth. These reforms cover everything from instituting more flexible labour laws, breaking cartels that control many industries and keep prices high, reforming the legal system, cutting red tape, and clarifying the tax system.

The real risk in Greece and other southern European countries, as Nixon points out, is “that easier financial conditions will sap political commitment.”

The ruling coalition in Greece has a very slim majority. With elections coming up it will take a very brave politician to press for these reforms to spur long-term growth when he faces a very-short term problem of getting re-elected. The main opposition party Syriza has loudly proclaimed its rejection of the tough reform conditions imposed by the so-called Troika – the International Monetary Fund, the European Commission, and the European Central Bank. This stance is popular with many voters because they are fed up with more than five years of penny-pinching austerity and are ready to support anyone who promises an end to their struggles, even if those policies might push Greece right back into the situation that created the mess in the first place.

Yes, the successful bond issue was an encouraging sign. One should be careful, however, not to read too much into that. Investors notoriously tend to have the attention span of fire-flies and can disappear as quickly as they arrive. Whether that bond sale was merely a one-off blip in an otherwise stagnant economy or a sign of real improvement depends entirely on the political will to create conditions for growth instead of government hand-outs. This takes much more time, effort and political will than a single bond sale.