Absolutely crucial is whether or not the current government will be able to avoid new austerity measures, redistribute some of the above target consolidation and obtain debt relief on the back of strong budget execution. If the government fails to meet these challenges, political risks will likely resurface.
Greece assumed the EU presidency on 1 January with a crucial agenda, concerning both European and domestic issues. At the European level, trialogue (European Commission, European Parliament and European Council) discussions on banking union, European elections, the end of the Portuguese economic programme and follow-up measures are among the key topics to be discussed in H1 14. Domestically, debt-relief discussions, the 2015-16 fiscal framework as well as European elections, which are likely to turn into referendums on government policies, are at the top of the list.
In line with decision by the Eurogroup, European governments will hold debt-relief discussions once Greece posts a yearly primary surplus for 2013. However, Greece will want to bring forward as much as possible these discussions and has already started to tour Europe seeking support.
Reaching an early deal on debt relief is, however, a daunting challenge for Greece and a first attempt in December by PM Samaras failed. European governments will move only extremely cautiously, either because some remain sceptical about the Greek government, or because they will want to avoid discussing new ‘bailout’ measures in the run up to European elections in May (22-25).
That said, Greece will face a challenging month in May as debt totalling EUR9.3bn will mature on the 20th/21st, most of it held by the Eurosystem. This means that by then, any discussions will have to be reasonably advanced in order to ensure a smooth repayment (in particular, ensuring that troika financing tranches are wired in time).
A reasonable solution would be to decide as soon as possible after the elections on some sort of debt relief (NPV haircuts rather than nominal haircuts, through maturity extension and lower interest rates). Similarly to adjustment programmes, debt relief would obviously be conditional on the future implementation of structural policies in line with the economic programme already in place.
Meanwhile, building on the encouraging data, and falling yields in peripheral countries, Greek Finance Minister Stournaras is openly discussing the option of tapping the markets this year as a way of closing the funding gap estimated at EUR11bn for 2014-15. Even though expressed cautiously (“one of many different scenarios”) the intention is clear, namely to avoid a third economic bailout and programme, and details are already envisaged – a 5 year note to be issued in H2 14.
A successful bond issuance would be a statement of confidence in Greece by the markets and would strengthen the Greek government’s case to reorientate the economic adjustment towards more growth-friendly policies. After all, the adjustment of the internal and external imbalance as well as the growth figure have so far exceeded previous expectations and this could, if not should, be used to ease the pain of the most exposed and fragile social categories.
However, some euro area officials have already expressed their opposition to such an option, favouring instead to stick to the existing programme and asking Greece to implement additional fiscal measures. We believe that depending on market conditions, a bond issuance would be a bold and strong statement that, if backed by further improvements in the economy, would send powerful signals supporting the Greek government’s current strategy.
The government will be tested at the European elections as they are likely to turn into a referendum for or against current policies. PM Samaras and Deputy PM Venizelos have already emphasised that the government risks being out voted by opposition parties if the troika insists on further austerity measures.
While the PM’s party, New Democracy, used to hold the upper hand over the opposition party Syriza, a poll (published by Efimerida ton Syntakton) suggested that this had reversed, with Syriza now holding a 2.5pp lead over ND. In the same poll, PASOK fell further behind with only 5% support while the extreme-right neo-nazi Golden Dawn party still secured 11.5% support, despite the prosecution of its leader in a criminal investigation.
Putting all this together, the government will fight for its political survival both domestically (against opposition parties) and externally (with the troika), suggesting H1 14 will be a high-risk period.