Greece gradually regains its economic footing

Last week, July 10, the Greek state raised EUR1.5bn ($2.05bn) with an interest rate of 3.5% through a three-year bond, both short of the desired target, but none-the-less described “a success under the circumstances”.

The target had been “near EUR3bn” and the borrowing cost about 3%. It was the country’s second bond sale since it returned to the market in April, but just before the sale clouds had appeared on the horizon creating concern the financial system in the euro area remains vulnerable after the five-year sovereign debt crisis threatens a rally in government bonds this year.

Portugal’s 10-year yield climbed above 4% for the first time since May 21 after a leading Portuguese bank missed a short-term debt repayment deadline.Spain’s Banco Popular, planned a bond issue for the same day as Greece’s, but unlike Athens decided to postpone bond issues on fearing the reaction of investors.

Talking about the decision to proceed, a top official at Greece’s Finance ministry, said: “Our objective was not about the amount we would raise, but rather the fact we can get it in spite of the adverse conditions and at the right interest rate.” Quoting an official ministry statement he went on to describe the issue’s result as positive given the “sense of insecurity among investors” and “despite the exceptionally adverse atmosphere formed over the last couple of days in international markets, especially in the periphery of the Euro zone”.

Prior to the issue the Finance ministry was stressing the latest three-year bond is a very different case to that of the five-year bonds issued in April. The investing public interested in three-year paper is not the same as that for five-year bonds.

As well as wishing to stay in touch with investors following the success of April’s issue and to further normalise the Greek yield curve, the issue filled a gap on the local bond market as there was no three-year bond. The next step will be for Greece to issue a seven-year bond, which is also missing.

There is also the practical reason of safeguarding the state’s liquidity in view of its August obligations, which run to Euro 6.7bn.

Meanwhile, Yannis Stournaras, the former Finance minister and newly appointed governor of the Bank of Greece believes political uncertainty around a presidential election scheduled for 2015 is the main risk to Greece's economic recovery.

Addressing a bank forum, 7 July, Stournaras said he expected moderate growth of about 0.5% of GDP this year, but warned there were still downside risks to the economic outlook. “Main risk is due to political uncertainty, related to the election of a new president in early 2015,” said Stournaras, who listed other challenges as a slowdown in the global economy and geopolitical risks in Russia and Ukraine, which could hurt exports, and the accumulation of non-performing loans, he said.

Under Greek law parliament must be dissolved if no presidential candidate secures 180 parliamentary votes – a level of backing not guaranteed for Prime Minister Antonis Samaras whose coalition government controls 153 deputies in the 300-seat parliament. Main opposition, the leftist Syriza party, which won the most Greek seats in the May European Union elections, has said it plans to block the presidential vote.

The driving force behind Greece’s economic reforms over the past two years Stournaras said they must continue in order to ensure recovery but active labour market policies could mitigate the impact of unemployment and should be a priority, along with measures to strengthen the social safety net.

He warned the accumulation of non-performing loans was the top challenge faced by the banking sector, but added a return to growth and falling unemployment should improve borrowers ability to pay back their debts.

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