Published January 23, 2014
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 Samaris, 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.