Europe’s Healing Starts and Ends with Greece

Greece, the place where Europe’s sovereign-debt crisis first emerged, finally looks like it could escape its bailout years. Yield-hungry bond investors are smartly going along for the ride.

Greece’s third bailout program is due to end in August 2018. Ireland, Portugal and Cyprus have all exited their bailouts; only Greece remains. Recent reviews with the International Monetary Fund and eurozone creditors have gone smoothly, in stark comparison with previous rounds. There has been nothing like the 2015 standoff that led to a Greek bank shutdown and capital controls. Greece’s exit from the bailout program could be an economic boon as well as a political prize: years of clashes with Europe have investor sentiment and activity in Greece.

Of course, Greece’s economy still faces big challenges: it has barely grown in recent years, and it has the heaviest debt burden of any European sovereign, although long maturities on its bailout loans provide some cushion. But the direction of travel is encouraging.

Greece has recorded three consecutive quarters of growth in 2017 for the first time since the crisis. Unemployment, while still far too high at above 20%, has fallen from a peak of near 28%. Bank deposits, while down 45% from their peak, have stabilized and risen 4.4% this year to their highest since 2015, and banks have started to return to bond markets. Excluding debt payments, Greece’s government is spending less than it takes in, and its near-term debt redemptions are manageable. As with other bailouts, the first condition for exit is relative stability.

That is being reflected in bond markets and should continue. Ten-year Greek bond yields last week fell below 5% for the first time since 2009. In yield terms, Greece is still an outlier: its two-year bonds trade with a positive yield, while Irish and Portuguese short-dated yields have turned negative along with the rest of the eurozone.

Greece represents the last big bet on lower yields left in European government bonds. Moreover, if Greece is to exit its bailout, it will need to keep the bond market happy: building a cash buffer, as Ireland and Portugal did, will be an important step.

Greece’s economy has a long way to go to repair the damage done by the crisis. But a bailout exit, which once seem far fetched, now looks like something to bet on.

Richard Barley

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