Greece has returned to the bond market, issuing $4.2 billion of five-year bonds at an interest rate of 4.95%. The government’s ability to borrow again is a “reward” for posting a surplus on its primary budget (although the accounting that produced the surplus has been questioned). This has been viewed as a sign, albeit fragile, of recovery. Portugal has also sold bonds and hopes to exit its bailout program this spring. But what does recovery mean for these countries, and is it sustainable?
Growth for these countries reflects a rise from a brutally harsh downturn. Greece has an unemployment rate of 26.7%, with much higher rates for its youth. Portugal’s unemployment rate of 15.3% was achieved in part by emigration.
A look forward indicates that the debt that drove these countries to borrow from their European neighbors and the IMF will fall in the next five years but continue at elevated levels. The latest Fiscal Monitor of the International Monetary Fund forecasts gross government debt to GDP ratios for these countries, as well as for the Eurozone:
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Greece | 171.3 | 162.5 | 153.7 | 146.1 | 137.8 |
| Portugal | 124.8 | 122.6 | 119.1 | 116.6 | 113.8 |
| Eurozone | 94.5 | 92.6 | 90.4 | 88.1 | 85.5 |
Even if the debt/GDP ratios above the Reinhart-Rogoff 90% threshold do not pose a threat to growth, it is noticeable that the Eurozone’s debt does not fall below it until 2018, while debt/GDP in Greece and Portugal will be in triple digits for many years.
These debt levels become more worrisome in light of fears of deflation in the Eurozone. Greek consumer prices have been falling, and inflation in the Eurozone is below its 2% target level. European Central Bank head Mario Draghi has downplayed these concerns, pointing to rising prices in other Eurozone countries. But IMF economists Reza Moghadem, Ranjit Teja and Pelin Berkman point out that even low inflation can also pose problems. Deflation and less than expected rates of inflation increase the burden of existing debt. Greece’s debt will become more of a burden if it rises in real terms. Low inflation also makes wage adjustment harder to achieve.
The ECB would (presumably) respond if the prospect of deflation became more likely. But would it be able to stave off falling prices through its version of quantitative easing? There are concerns that large-scale purchases of assets by the ECB might not be as effective as anticipated. Interest rates have already fallen and are unlikely to fall further. Moreover, the decline in borrowing costs for Greece and other sovereign borrowers may have already have factored in ECB intervention.
Draghi’s pledge in 2012 to do “whatever it takes” to protect the euro undoubtedly lowered concerns about a collapse of the Eurozone. But, as I have argued before, the confidence within the Eurozone inspired by the ECB’s powers could vanish, particularly if there were doubts about the ECB’s ability to actually accomplish whatever it takes to avoid deflation. Lower borrowing costs based on faith in the ECB will ease conditions in the Eurozone crisis countries. But they need to be backed up by improving economic fundamentals before they are seen as justified. Until then, purchasing sovereign debt is a high-risk proposition, no matter what the interest rates signal.
With the data reported in this blog article, it seems like Greece and some European countries have a difficult time recovering their economy. However, I wonder whether labor mobility will help these countries once their borrowing ability from IMF fells. Labor mobility should occur in theory once the unemployment of Greece hit to about 30%. I am not sure whether language barrier and skill barrier will keep people in Greece from moving into its neighbor countries for employment.
While we are on the topic of labor mobility within Europe, I’ve found an interesting speech given by László Andor, a European Commissioner responsible for Employment Employment, Social Affairs and Inclusion, posted in the EU website. (link: http://europa.eu/rapid/press-release_SPEECH-14-115_en.htm)
Andor acknowledges the fact that despite the Eurozone’s growing economic integration, labor mobility is very low(compared to that of U.S.) and hostile sentiments towards emigrant workers are growing among natives. He also notes how the EU is trying to alleviate the problem beyond its existing EU Treaty rules on free movement of workers. The Directive that was proposed last year and waiting for approval this year includes requiring Member States to set up institutions that educate employers, EU workers and their families the rights and obligations under EU law and providing structural measures to redress emigrant workers who have faced discrimination or unfair treatment. More interestingly, the Commission is also working on expanding the EURES — the pan-European job-search network –, in order to facilitate better job matching for employers and workers across the EU.
I think these are interesting developments that would hopefully lead to a more mobile labor force for Europe, which could expedite its recovery. But then again, I am not fully aware of the trends in immigration laws for individual Member States within EU and political constraints that might pose as obstacles.
Feel free to share your knowledge and opinions!
I truly think the economy is recovering in Europe – and I’m basing this opinion on articles I have read on Consumer Sentiment, for example. It, of course, could be that the more stable economies are carrying numbers such as unemployment for the euro-zone; however, the commitment from Mario Draghi makes me ‘believe’ in the longevity of the currency and of the free trade zone.
If the unprecedented and persistent high unemployment in the southern countries of Europe (i.e. Italy, Spain, Greece) along with extremely low inflation, continue I think it could lead to: 1 – an exit from one of the weaker European countries from the euro in order to maintain a stable currency or 2 – a boost in emigration south to north, regardless of language. These scenarios of course, are quite unlikely and as it seems now, a bit far fetched. Only time can tell how these economies will perform and how the role of the speculative investor will aid (or harm) each country.
Why are we still seeing references to the ‘Reinhardt-Rogoff 90% threshold’ when it’s been shown and widely publicized that this ‘threshold’ was the result of a spreadsheet error?
There IS NO 90% DEBT THRESHOLD.
Hmm I’m hesitant to say that Greece’s timid return to long term capital market is a sign of recovery, albeit an artificial one. This was only possible with continual support from the eurozone and IMF. Investors are wary of this re-investing in Greece as being merely unsustainable ‘hot money’ which would not be a good factor since these bonds are for the long run.
Moving forward, the key way for Greece to prove it is recovering is to make well in its bond payments. This is of course possible through continual support and good standing with the IMF, the european central bank and the European commission.
Despite mixed signs of recovery, perhaps the most important step in helping Greece recover is for the faith and support of investors to overlook discouraging factors here and there and to take a leap of faith by buying a bond.
I don’t think Greece recovery is sustainable. Not only is the surplus in its primary account questionable, further, this budget perception might enable Greece to garner more sovereign debt than it should when it’s debt to GDP ratio is abnormally high. I think the long term economic indicators, such as unemployment, political risks such as anti-austerity strikes indicate that the economic fundamentals if Greece are still quite weak. Deflation not only increases the debt burden and real interest rate that borrowers pay, but since other euro countries are also experiencing deflation or low inflation, Greek exports to ther euro zone countries will not become more competitive because of deflation either. The bonds issued are of relatively short duration, and I agree that words only mean so much for so long. For the recovery of Greece to be sustainable, the public certainly needs to observe greater changes in economic fundamentals a few years down the road.
From your post it seems like the fate of Greece is resting a great deal in the ECB’s hands and their ability to do ‘whatever it takes’ to protect the euro. Is a ‘Grexit’ still a possibility though? Would this be a way to protect the Euro, at Greece’s expense? Also, this post focuses a lot on the role of the ECB in staving off deflation to help Greece’s economy, but does the IMF still have an active role here?
I understand why Greece re-entered the bond market-to show that there are foreign investors willing to invest in Greece’s bonds four years after Greece’s bonds rapidly increased in interest after investors lost confidence in Greece’s ability to repay its debt, however, I question the effect it has had on foreign investors. Though Greece has had a primary surplus and is repaying its debt towards the IMF and EU, there haven’t been any indicators of stability in Greece’s economy such as low unemployment (as of today, Greece’s unemployment fell to 26.5% in February), there’s a lack of liquidity in domestic businesses, consumption spending is on a downward spiral, and there’s a high risk of poverty in Greece currently. I believe if Greece truly wants to attract foreign investors back to Greece, a good way to start is to focus on its domestic economy and restore confidence in Greece’s economy among its citizens.