Analysts at BoAML expect Greece to expand by 2% in 2018, with risks becoming more balanced since growth performance has consistently surprised official forecasts to the downside so far. Furthermore, a stronger recovery requires decisive action on debt relief and dealing with bank NPLs.
Greece is meeting fiscal targets and concludes program reviews on time. There are no heavy debt maturities threatening default and Grexit. Growth is finally positive. Forecasts from BoAML point to a re-profiling of the official loans to Greece and conclusion of 4th program review by summer.
We argue that the most likely scenario after August is a strict post program monitoring mechanism, rather than a new program or a conditional credit line.
Short term risks linked to what happens after August
Assuming Greece has a clean exit from official adjustment programs, the government will have to persuade markets that it will stick to its agreed fiscal targets and will not start reversing structural reforms. The temptation to deviate from the agreed plan could be high, particularly ahead of elections within a year. We expect strict market scrutiny and any backwards steps could lead to negative reaction.
Long term challenges remain
In the years ahead, Greece’s weak link remains its banks. The stock of non-performing loans remains huge and the pace of cleaning it up very slow.
More broadly, long term economic growth will determine whether the numbers add up in Greece or not. Experts at BoAML have always argued that Greece could see much faster growth rates in the long term if more serious structural reforms were enacted.
GGBs: same challenge as for rest of periphery as QE ends
Following a stellar performance throughout 2017, Greek bonds registered returns only similar to those of other peripheral bonds year to date, but with much higher volatility. Supply and weak equities were the main driver of weakness. Going forward, in the same way other peripheral bonds face the end of ECB net QE purchases, GGBs are facing the prospects of a complete exit from the EU/IMF programme in August.
We think that what will ultimately matter isn’t politics but the strength of the economic outlook in the Euro area and the new policy stance of the ECB regarding rates forward guidance.
Narrow QE window of opportunity
GGBs could become eligible for ECB QE for a very short period before QE ends if the agreement on debt relief takes place before Greece’s official program ends in August. If Greek bonds can be deemed eligible, there is a chance buying happens even beyond the end of net asset purchases, as the ECB could redirect the “reinvestment” of the principal from other maturing QE bonds partially towards GGBs.
We calculate that the maximum notional amount of GGBs that the ECB would be able to buy, given the 33% limit, is €4bn.