Seeking Sustainable Growth
Finance Minister Christos Staikouras says measures have been taken to restart the real economy, attract investments, and fuel future growth.
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An aerial view of Greece’s capital city, Athens, with rays of sunlight shining atop the Acropolis. Copyright by Giannis Giannelos
Greece is open For Business
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8.53%
Dec. to Dec. (YoY) improvement in IOBE’s economic sentiment indicator
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158 seats
Government’s parliamentary majority (out of 300) in the first single-party government in the last decade
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0.9%
yield on 10-yr bond in Feb. 2020
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5
quarters of consecutive growth published to Q3 2019
Last updated 21-02-2020
Greece is firmly back on the radar of investors. A new investment landscape is emerging, with improved sentiment as reforms proceed and economic recovery gathers pace. After years in the economic wilderness, Greece is returning to normality and prospects are their brightest for more than a decade. However, many challenges remain and must be tackled effectively if the new economic miracle – something that was unfathomable just a few years ago – is to materialise and have lasting effects on the country and its people.
Insights related to Introduction
A New Investment Landscape
Investors once more have Greece on their radar, and economic prospects are their brightest for years amid political stability and improved sentiment; but reforms must continue as many challenges remain.
The time is ripe for a plethora of investments as a new, brighter economic landscape takes shape in Greece. After an economic and political odyssey that took Greece to the edge of the abyss, the country is finally returning to growth and normality, while economic prospects are the best that they have been in more than a decade. Foreign direct investment (FDI) continues to rise, and unemployment is falling as the economy emerges from a deep recessionary tunnel.
After a crippling crisis saw economic output contract by an unprecedented 25% and unemployment skyrocket, the country’s economy is now recovering strongly, and the jobless numbers are declining steadily – though they are still the highest in Europe.
Greece is back on a growth path, while key credibility and confidence factors are also on the up. And, markets have so far taken a shine to the more market-friendly, pro- growth policies and initial reforms of the new centre-right government of Prime Minister Kyriakos Mitsotakis.
The important tourism and shipping sectors – two of the main drivers of the Greek economy – continue to power ahead. Meanwhile investments have been increasing in an array of sectors, ranging from renewable energy to real estate, as the political environment shows growing signs of stability. This is all helping improve sentiment in the country: talk has changed from how to get your money out of the country during the crisis years to how to get it back into the economy as the sentiment pendulum swings the other way.
According to the latest figures from the Bank of Greece, FDI inflows in 2018 reached a historic high of €3.3 billion, a 13.8% increase from 2017. Overall, FDI has tripled between 2015 and 2018 and is on track for a new record in 2019.
Economic output is expanding, fiscal goals are being met, and business activity is up, reflecting the country’s new growth phase. The upturn is reflected in the economic mood that spiked further upwards after the last elections in the summer of 2019.
Annual economic output is expected to reach the 2% mark in 2019, expanding for the third year in a row, according to forecasts, while the government predicts an ambitious economic growth rate of 2.8% in 2020.
Copyright: ATHEX Group
Business sentiment is the highest since early 2008, while soaring investor sentiment is also evident on the Athens bourse, which – hard to believe a few years ago – was a world-beater in 2019. The Athens Stock Exchange was the best-performing market in Europe in 2019, with the General Index gaining nearly 50% that year.
Another indicator of confidence, felt by people on the streets of Athens and elsewhere around Greece, is reflected in bank deposit levels. Bank of Greece data shows that deposits from businesses and households rose to €143 billion in December 2019, versus €126 billion in 2017, and €121 billion in 2016 – though they are still way off their pre-crisis peak of €238 billion in September 2009.
Klaus Regling, Managing Director of the European Stability Mechanism (ESM), says Greece’s fiscal efforts are bearing fruit; but reforms must continue, and challenges remain. “The Greek government is reaping the fruits of a favourable market perception, the results of reforms implemented during the ESM programme and continued reforms,” he said. But he also added: “In the ESM’s view, growth-friendly initiatives are much needed since Greece’s economy is still vulnerable. It is particularly important that these initiatives give special weight to strengthening the institutional quality in Greece, as this has enormous influence on long-term growth.”
Looking at today’s conditions, it is important to differentiate between what is transpiring at present and the false start Greece’s economy experienced in 2014. Then, the country looked like it was exiting the crisis amid rising investments and a growing gross domestic product.
And yet, snap elections were held in January 2015. Six months later the country experienced a dramatic summer that nearly resulted in a ‘Grexit’ and Greece flying out of the eurozone.
This time round, however, there are several key differences. Firstly, the recovery is now at a much more advanced stage; and secondly, the political situation in Greece boasts much greater stability.
Defining moments between 2008 and 2020
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- September 2008
U.S. investment bank Lehman Brothers collapses; within days the financial crisis spreads to Europe.
- October 2009
Early parliamentary elections result in a victory for centre-left PASOK’s George Papandreou. Several weeks later he reveals that Greece’s budget deficit is 12.7% of GDP, almost double the figure reported by the previous government. It is later verified that the shortfall is actually 15.6% of GDP.
- April / May 2010
Eurozone members and the International Monetary Fund (IMF) agree to provide Greece with a €110 bn rescue package in exchange for stringent austerity measures.
- June 2011
Amid mass protests, the Hellenic Parliament approves a €28 bn package of budget cuts and tax hikes.
- November 2011
George Papandreou resigns as prime minister; Lucas Papademos takes the helm as a caretaker prime minister through a coalition government comprised of PASOK, centre- right New Democracy, and right-wing LAOS.
- March 2012
Through the PSI, also known as the private sector haircut, an estimated 97% of privately held Greek bonds (about €197 billion) took a 53.5% cut off their face value, resulting in approximately a €107 billion reduction in Greece’s debt stock. A second bailout package of €130 bn was approved, including a bank recapitalisation worth €48 bn.
- May / June 2012
Greece holds parliamentary elections in June after attempts to form a government fail, following previous elections in May. A new coalition government is formed on 20 June, comprising New Democracy, PASOK, and left-wing DIMAR, under the leadership of Antonis Samaras as Prime Minister.
- November 2012
Eurozone members and the IMF agree to slash an estimated €40 bn from Greece’s debt.
- January 2015
A snap general election brings about the first ever victory of far-left party Syriza, winning just shy of an overall majority. Alexis Tsipras is sworn is as prime minister after reaching a coalition with right-wing ANEL and vows to put an end to austerity.
- June – August 2015
The European Central Bank (ECB) halts emergency funding, capital controls are imposed, banks close for three weeks, and Greece defaults on repayment of an IMF loan. While a third bailout is unanimously rejected by Greek voters in a referendum, a third rescue package worth €86 bn is accepted.
- September 2015
Tsipras wins a snap election after losing his majority in parliament, and commits to move ahead with difficult reforms.
- April 2018 – August 2018
Greece’s economy enters its fifth quarter of positive growth, while outperforming budget surplus targets. In August, Greece exits the third bailout programme.
- January /March 2019
After a 10-year hiatus, Greece returns to international capital markets raising €2.5 billion in January with a 5-year bond sale, and €2.5 billion with its first 10-year bond in nine years. Greece raised an additional €2.5 billion at a reoffer yield of 3.9%.
- July 2019
New Democracy’s Kyriakos Mitsotakis wins a snap election, with an outright majority, forming the first non-coalition government in a decade.
- July 2019
Greece sells a 7-year bond raising €2.5 billion, at a yield of 1.9%.
- September 2019
All remaining capital controls are lifted.
- October 2019
Greece sells an additional €1.5 billion of the March 10-year issue. The reoffer yield, however, was a demonstrably lower 1.5%.
- January 2020
Following an upgrade of Greece’s rating by credit ratings agency Fitch to BB, Athens issues its longest-dated bond since the financial crisis. The 15-year bond sale was received with calls for the €2.5 billion bond exceeding €18.8 billion.
- February 2020
Yields on Greece’s 10-year bond reached a new record low, falling to 0.9%.
After winning re-election in September 2015, the leader of left-wing political party Syriza, Alexis Tsipras, just about exhausted his four-year term in office – an unusual development in Greece, where snap elections are more the norm than the exception.
During this period of relative stability, street demonstrations largely dissipated, and the economic recovery gained traction.
And after July 2019’s general elections, conservative party New Democracy was chosen to govern the country under the helm of Kyriakos Mitsotakis. The Harvard-educated, former financial consultant is a person seen by many – especially the markets – as the reformist who can deliver, and the leader who can create jobs, a key demand among Greek voters.
With a 158-seat majority in Greece’s 300-seat legislature, Mitsotakis has the luxury of being able to govern without a coalition partner. It is important to note that this is the first single-party government that has been elected in Greece since 2009.
Apart from this majority helping Mitsotakis make decisions he can implement, it also means that the stability of the government is not reliant on a fragile political partnership. Furthermore, parliament’s election of Katerina Sakellaropoulou as the country’s first female President of the Republic reinforces political stability going forward, as well as helping to close the still-too-large gender gap for senior posts in Greece.
But beyond the numbers, the economy has emerged from the crisis in a different shape. Many argue that this may well partly be a result of the crisis years forcing many businesses to rethink their strategies in a more extroverted way and spawning a spate of new start-ups. Exports and foreign markets are top on the priority list of Greek businesses, many of which had previously focused on domestic consumption.
The Hellinikon Project in Athens, Greece. Developer: Lamda Development S.A.; Architect: Foster+Partners (Master Planner). Copyright by: Lamda Development S.A.
Real estate prices are recovering and the flagship Hellinikon urban development at the site of the former Athens airport finally appears to be ready for take-off. The long-awaited €8 billion mega-project is expected to add 2.4% to the country’s economy and create 75,000 jobs during its construction phase alone.
And when Hellinikon does begin, it will likely act as a magnet for a host of other potential investments, both domestic and international, at a time when a number of privatisations are in the pipeline and Greece’s banks are tackling their NPL and liquidity demons.
According to Pierre Moscovici, the former European Commissioner for Economic and Financial Affairs, Taxation and Customs, investor confidence in Greece has dramatically increased and can continue to do so provided the reform momentum is maintained. “I am very optimistic about the prospects for the Greek economy. I am encouraged that the authorities have made clear their commitment to continue with a number of key reforms and measures to boost growth and jobs in Greece (…) investor confidence in Greece has already increased quite markedly and can continue on that trajectory provided the reform momentum is maintained,” he said.
The government’s pro-investment policies have so far had a positive impact as far as markets are concerned. And the message going forward to investors is clear: “the country has turned the page”, says Prime Minister Mitsotakis, adding that his government will “continue to do whatever it takes to restore credibility in the Greek economy”.
Buoyant bonds
Greece returned to international capital markets with a string of successful bond issues in 2019 and early 2020, reflecting rising confidence in the country and supported by a series of upgrades by international credit ratings agencies.
With an eye on the favourable conditions in Europe and an improving domestic economic environment, Greece pounced on the moment and has so far made four successful bond issues, helping the country beat funding targets, while Greek bond yields dropped dramatically, with the benchmark 10-year bond yield falling to a historic low below 1% in early 2020.
An added boost is the type of investors attracted to Greece: European asset managers and pension funds (investors with more of a long-term strategy) largely replaced speculative hedge funds as buyers of Greek bonds.
On the downside, Greek bonds are still some way off from investment grade. It is not known when, or if, they will regain investment status and become eligible to potentially attract a much bigger pool of available funding managed by international pension and investment funds. But for the first time, speculation has emerged as to when this could occur, with the prime minister hinting that it could happen in the first half of 2021 – a landmark year for Greece as it also marks the bicentenary of the start of the Greek Revolution of 1821, an event that led to the formation of the modern Greek state.
Sentiment has also been bolstered after an outstanding obstacle for investors was overcome, the removal of capital controls. Introduced in the summer of 2015, the controls were finally fully lifted in September 2019, removing another burden from the shoulders of the economy.
Greece’s recovering banks are also helping to provide stability to the economy and country.
An ambitious plan to further reduce bad loans by the country’s top four lenders is helping the financial system get stronger and play a more active and supportive role in the economy.
“The efficient management of non-performing loans is of utmost importance for banking sector stability, economic development, and social cohesion, since it not only improves the financial soundness of banks but also frees up funds and resources to be directed to other, more productive sectors of the economy, resulting in higher productivity and output growth,” says Bank of Greece Deputy Governor Theodoros Mitrakos.
Copyright: De symbiot / Shutterstock.com
Klaus Regling Managing Director of the European Stability Mechanism (ESM)
Paving a Path to Stability
Klaus Regling, Managing Director of the European Stability Mechanism (ESM), says Greece’s fiscal efforts are bearing fruit; but reforms must continue, and challenges remain.
Read the full interview
Running hard, but Challenges Remain
Prime Minister Mitsotakis certainly hit the ground running, but he and his government need to keep up the pace if they are to maintain New Democracy’s pledge to change the fiscal mix, bring more tax cuts, and implement investor-friendly policies to help boost liquidity in the real economy, with the aim of strong growth and the creation of lots of good jobs.
“I believe we have embarked on a sustained boom in Greece, one that is likely to surprise analysts with both its durability and its strength,” says Mitsotakis.
The initial results are promising. However, despite the good news, Greece has many hurdles ahead and a number of challenges remain. These range from still-high taxes and bureaucracy to risks from a slowing global trade environment and an uncertain geopolitical climate. The longer-term impact of the Novel Coronavirus outbreak is another serious concern for the global economy, with fears that Greece’s tourism and other key sectors could also be affected by the potential global economic fallout.
On the international front, Greece has strengthened its ties with a number of countries, including the U.S. and China, which has made significant investments in Greece’s port and transport infrastructure. However, tense relations with neighbouring Turkey have become more strained than ever as the regional geopolitical sands shift, bringing more uncertainty into an already complex equation.
And all this at a time when we are soon to find out wha that infamous phrase uttered by former British Prime Minister Theresa May – “Brexit means Brexit” – really means, not just for the UK, but also for the rest of Europe and Greece. Meanwhile, the result of U.S. elections later in 2020 will also have a significant impact on how the global geopolitical map will unfold in the coming years.
Additionally, despite the fiscal improvements and a string of upgrades by international credit ratings agencies, Greece’s public debt remains too high and is probably unsustainable in the long-term.
Furthermore, the slowdown in the global economy comes just as Greece’s recovery picks up, which could put damper on growth. The country has also had a tough time pushing through certain reforms, opposed by vested interests that have been present in the economy for generations.
And despite a host of tax cuts already announced by th new government, taxes on businesses and individuals remain too high and are a threat to growth, while asphyxiating fiscal goals imposed by the country’s creditors still remain in place. However, it is hoped that Brussels will soften the punitive primary surplus targets to which Greece is tied in the not-too-distant future. It is also hoped that Greek bonds may eventually benefit from the quantitative easing program, if positive noises from new European Central Bank President, Christine Lagarde, in Frankfurt come to fruition.
But even if Mitsotakis finds a sympathetic ear in Brussel in his bid to secure softer fiscal targets, these changes will probably have to be taken to the parliaments of those eurozone countries that funded Greece’s bailout loans – a task every finance minister in the eurozone still dreads.
“In 2020 the [primary surplus] target of 3.5% will be fully respected. From 2021 onward there needs to be a transition towards lower primary surpluses. As we do that, there will also be more fiscal space that will facilitate growth enhancing policies. We are a government dedicated to reform and as our initiatives unfold in 2020, we will discuss with our partners the extent to which we can smooth the 2021 and 2022 targets,” says the prime minister.
Perhaps the biggest challenge for Greece has less to do with the economy, and more to do with the country’s social fabric. Spending on health, welfare, and education – areas tragically hit by the crisis – will play a large role in maintaining social cohesion and support for the government. These long term challenges must be met even, while the ever-worsening migration crisis threatens to boil over and the country’s demographics deteriorate further, with the population ageing and birth rates falling.
All these issues, along with the need for greater meritocracy and transparency, will need to be addressed if Greece wants to reverse the so-called ‘brain drain’, which saw an estimated half a million, mainly young, well-educated Greeks leave the country during the crisis years for a better life abroad. Greece must attract them back to tap into their expertise and help drive future growth and innovation, as well as boost social security and tax contributions and also help bridge the growing demographic divide.
“We believe that our commitment to the promotion of innovation and to the creation of an investment-friendly environment will contribute substantially to reversing the brain drain, if not converting it into a brain gain,” says Prime Minister Mitsotakis.
Copyright: Greece Investor Guide
Yannis Stournaras Bank of Greece Governor
Significant Upside Potential
Bank of Greece Governor Yannis Stournaras says Greece is ready to exploit its growth potential, yet remaining structural deficiencies must be addressed to help bolster foreign direct investment.
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Visit of the Greek Prime Minister to the ECB - 17 December 2019. ECB President Christine Lagarde sits down for a meeting with Greek Prime Minister Mitsotakis and his delegation during his visit to the ECB. Copyright European Central Bank
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