New opportunities on greek debt
24 April 2019
Greece became the 10th member state of the European Union in 1982. In May 2010, the Troika (ECB-European Commission-IMF) agreed the first €110 billion bailout for Greece, in exchange for an economic adjustment programme.
Having failed to honour a repayment on 5 June 2015, the country’s crisis escalated further, with massive outflows from Greek banks. A new plan emerged after the Eurogroup meeting of 12 July 2017. And there was no Grexit...
Greece has come a long way since then. Its growth forecast is 2.2% this year and next, according to Eurostat, after 1.9% in 2018, its best performance for a decade. For the first time in 15 years, Greece could post growth in the region of 2% for three years in a row, displaying considerable resilience to the economic slowdown in the eurozone over the last year. The domestic economy, which has benefited from a rise in real incomes and a marked fall in the unemployment rate (HSBC estimates a 10-point drop between 2014 and 2020), is rebounding strongly. However, investment is still at low levels and the banking sector remains weak, although the banks have not had recourse to the emergency liquidity assistance (ELA) to access ECB liquidity since the end of 2018, and deposits by Greek households are growing, albeit slowly.
And while its recovery in growth is gathering pace, Greece has achieved a notable fiscal performance, with a primary surplus estimated at 6.6% this year by the IMF, and debt now going in the right direction, projected to fall from 188% of GDP in 2018 to 177% in 2019, plus a budget that should be in balance from this year. Although this is extremely positive, there is an important factor to consider: whether or not the reforms passed on pensions and public sector pay cuts are constitutional. The IMF has warned that there will be a significant cost if these measures were to be deemed unconstitutional.
The rescue plan extends until 2022, and the country is continuing to pay down its debt. Moreover, the country’s refinancing needs will be fully covered by the government’s liquidity reserves (close to €40 billion) until 2023. Greece has made its return to the bond markets and should proceed with fresh issues this year given the level of yields (3.50% on the 10Y). In view of the positive fundamentals and the appeal of Greek yields, with volatility at standard levels, Greek debt presents real investment opportunities.
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