Last week, the Greek debt crisis made a rude comeback as the country's sovereign bond yields soared. This week, the crisis pretty much vanished. Still, the Greek bond rout served as a stark reminder that the country that handed Europe the debt crisis five years ago is still exceedingly fragile, in spite of government propaganda that insists otherwise.
Greek sovereign bond yields shot up to almost 9 per cent last week, during the height of the global market turmoil that sent global oil and share prices plunging. Only a few weeks before, Greek yields had hit a post-crisis low of about 5.6 per cent. The reversal was shocking. In 2010, when Greek yields shot through 7 per cent and kept going, the country found itself shut out of the debt markets and used a bailout from the European Union and the International Monetary Fund to avoid certain bankruptcy.
By Thursday, the yields had dropped to about 7.2 per cent. That's still high compared to September's level, but low enough to indicate that Greece is not vaulting towards another debt crisis.
Since mid-2012, when ECB president Mario Draghi said the bank would do "whatever it takes" to keep the euro zone intact – translation: Greece will keep the euro at any cost – Greek bond yields have been falling, along with those of Spain, Portugal, Italy and other hard-hit countries. Earlier this year, Greece re-entered the bond market with an oversubscribed five-year issue, followed by the sale of a three-year issue. The sales built up the confidence of the Greek finance ministry and it wasn't long before the pro-austerity, pro-bailout government of prime minister Antonis Samaras was pressing for an exit from the international bailout program. Athens was hoping to make its escape in December, when the EU portion program is set to end (the IMF portion is scheduled to run until early 2016).
A combination of widespread skepticism about Greece's ability to make a clean break from the bailout program and fund itself, political instability and the extreme bout of global market volatility are to blame.
Political instability is a clear and present danger. Syriza, the radical left opposition coalition that leads the popularity polls, and which won the European Union elections in May, could trigger a snap election. The coalition government must elect a new president in February. If the effort fails, an election would follow quickly and Syriza could win. While Syriza does not want to reprint the drachma, it does want to write off half of the country's debt and ease off on the harsh austerity that brought a punishing economic depression along with structural reform. Greece's economic output has fallen by a quarter since 2008.
While Greece does not face a fresh funding crisis, its economy remains in dire shape. Its touted turnaround has been endlessly delayed. Official forecasts suggested the country would return to growth in 2012 and keep going. Nothing of the sort happened. The recession is getting shallower but, by the second quarter of this year, was still fully intact, with a GDP fall of 0.3 per cent over the same period a year earlier. The higher taxes combined with the lower wages – surprise! – ensured that consumers had no appetite for spending.
The Greek economy is expected to expand next year but there will be no "V-shaped" recovery, the economists' turn for a sharp rebound after a sharp contraction. Too many figures are still going in the wrong direction. Manufacturing fell slightly in September, exports are not rebounding, nor are economic sentiment indicators. Debt is 175 per cent of GDP, the highest in the Western world (though reductions in debt maturities and interest costs have substantially cut the effective cost of that debt).
About the only good news is that tourism is booming, with double-digit increases in both spending and arrivals since last year.
With the Greek economy recovering far more slowly than expected, the Greek government's dreams of an early exit from the bailout program seem like a dream indeed.