Wednesday, April 16, 2014

Revisiting Greece

This was published this week, but will not be required for the last exam in Spring 2014.

Greece has been off macro radar screens for about 2 years. Is that a good thing?

Yes and no.

Greece recently sold out a $4B government bond issue. That’s a good sign; Greece hasn’t tried to sell bonds at all the last few years (recall from finance that the biggest pitfall in any public offering is not selling out the whole thing — because then the people who did buy know they’ve paid too much).

And yields on Greece’s government bonds are back to levels last seen at the start of the financial crisis:

But, there’s also evidence that this is all political spin.

A good-news operation has been under way since the start of the year.

Ms. Merkel arrives in Athens on Friday—her second visit since Mr. Samaras took office in summer 2012. Greece's return to longer-term market borrowing just 24 hours before serves as the perfect red carpet for the German leader.

In private, these officials say their political bosses have told them to contain their concerns about Greece's economy.

And concerns they have. European Commission and International Monetary Fund officials privately say that, despite signs that the Greek economy has finally bottomed out after a six-year recession that has claimed a quarter of its output, the return to sustained growth is far from certain.

They are especially worried that a number of laws the Greek Parliament has passed to overhaul its public administration, labor market and goods and services markets won't be properly implemented.

These include laying off more public-sector workers in the next few months, liberalizing the sale of nonprescription drugs and cutting employer contributions that finance auxiliary pension funds but drive up the cost of labor.

The absence of political pressure from EU leaders to forge ahead with these policies ties the technocrats' hands.

Technical discussions about Greece's progress have turned surreal, says one senior euro-zone official, as Germany, the country that was always toughest on Greece in past meetings, has "turned soft." Another wonders where the pressure on Greece might come from "when the Germans don't want to play bad cop."

Officials also know that tough talks on how to further ease Greece's debt burden lie ahead and that the country's bailout won't see it through 2015 and 2016. More loans could be needed.

This very much sounds like the Germans have been playing for time. Funny that … Germany held an election in 2013, halfway between when the Greek crisis bottomed out in 2012 and today. Would I be cynical if I thought they took bandaid solutions to make sure they got reelected.

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