A year ago, Greece seemed on the verge of leaving the euro zone. Depositors were draining their savings from Greek banks and a radical left coalition that advocated a halt on debt repayments – default, in other words – seemed sure to win the election.
You wouldn't recognize Greece today. Its credit rating has been upgraded, the Athens stock market is on fire and 10-year government bond yields have shrivelled to 8.2 per cent, down from nearly 30 per cent at this time last year. Greece is no longer hurtling toward official insolvency.
There is little doubt that Greece is in better shape than it was a year ago. The radical left did not win the election; a centre-right coalition faithful to Germany's austerity demands formed a (so-far) stable government. Investors who bought Greek bonds and shares have made fortunes and the Finance Minister, Yannis Stournaras, recently predicted that economic growth could turn positive as early as the fourth quarter, after five years of grinding recession.
But some harsh new economic data are putting the recovery scenario into doubt. The latest came on Monday, when the Hellenic Statistical Authority reported that Greek industrial orders were down 12.7 per in March, year on year, while industrial sales were off 11.5 per cent. Unemployment keeps climbing – the youth jobless rate is an astounding 64 per cent – and gross domestic product keeps falling. Since the start of the crisis, the economy has contracted by about 25 per cent.
The improvement over the past 12 months is primarily in foreign investor sentiment, not in the real economy. Greece – equipped with two bailouts and the good wishes from the European Commission, Germany and the International Monetary Fund – is no longer in imminent danger of leaving the euro zone and reprinting drachmas.
It was that fear that sent Greece to the brink of destruction about this time last year. "Fear of exit and disorderly default were the factors that weighed heavily on the Greek economy," said George Pagoulatos, professor of European politics and economics at the Athens University of Economics and Business and former director of strategy for Lucas Papademos, who was prime minister until 2012. "No one talks about that any more."
Since then, bull market mania has gripped investors. When the "Grexit" threat vanished, so did the bank run. The restructuring and consolidation of the banks have sent the value of the survivors soaring, turning the Athens stock exchange into one of the world's top performers. It is up 25 per cent since January and 106 per cent in the past year.
Greek bond yields are so low (though still the highest in the euro zone) that Greek Prime Minister Antonis Samaras said the country may re-enter the debt markets next year. Last week, Fitch upgraded Greece's debt to single-B-minus from triple-C. That's still firmly in junk territory but the upgrade was treated as a vote of confidence in the government's financial management and slavish obedience to the austerity demands.
The good news pretty much ends with stock and bond rallies. The Greek economy is still sinking at a fearsome clip, well after it was supposed to be recovering. As independent economist Shaun Richards noted in a report published last week, the original international bailout documents, from 2010, predicted "growth recovery" in 2012 because of renewed confidence, regained market access and structural reforms.
That didn't happen. Nor did the job losses stop. Greece's unemployment rate was expected to top out at 15 per cent in 2012. That too proved a fantasy as harsh austerity and the wider euro zone recession ripped through the economy with the efficiency of a chain saw.
The latest jobless rate is 27 per cent. There is almost no work for the youth and hundreds of thousands of employees have not been paid for months, according to Nick Malkoutzis, deputy editor of the English-language edition of the Kathimerini newspaper in Athens. He wrote that Greece may be at the point where "no amount of good will, positive press and market confidence make up for the fact that the real economy is spluttering toward a standstill after 19 consecutive quarters of contraction." Monday's industrial figures support his pessimism.
Economic recoveries can be strange animals. Job losses can continue and the economy can remain in deep recession even as confidence and markets rise. There is always a lag before economic recovery catches up with investor sentiment. Mr. Pagoulatos thinks "the turn has happened" even if the GDP and unemployment figures suggest it is yet to come.
The Greek people apparently don't share his optimism. Their wariness is warranted. No country in Europe has suffered as much damage as Greece. This may be one case where the markets have jumped the gun not by weeks or months, but maybe by years.