The prodigal son

THE journey has been an epic one, but Greece has reached, if not the destination, at least a waymark. The last time that its government raised long-term funds was in March 2010, just weeks before the markets lost confidence in Greece altogether, forcing its first bail-out. This week the Greek government returned to the markets, raising €3 billion ($4.1 billion) in five-year bonds at a yield of just under 5% in a heavily oversubscribed issue.

The amount might be small and the yield high compared with borrowing costs in other rescued countries, such as Portugal, whose five-year notes were trading at around 2.6%. But the notion of any bond issue at all still prompts eye-rubbing, given the depth of the Greek crisis. Six consecutive years of recession have seen the economy shrink by a quarter, prompting social and political turmoil that at its worst seemed quite likely to push Greece out of the euro zone. For most of the past four years a return to the markets on any terms seemed inconceivable, a view underscored by vaulting bond yields (see chart).

Over this period Greece has been wholly reliant on help from euro-zone governments and the IMF to meet its financing needs. In May 2010 it received its first three-year bail-out, of €110 billion. The aim then was that it should start tapping the markets again as early as 2012. Instead within less than two years Greece required a second and even bigger bail-out, raising the total amount of funding from euro-zone lenders and the IMF to €246 billion by 2016, equivalent to 135% of last year’s GDP.

The scale of the rescue effort was made necessary by the delay in recognising that Greece was bust and needed a debt restructuring; much of the early official lending was used to repay private creditors as the bonds they held matured. In early 2012 Greece did carry out such a restructuring, wiping out over €100 billion of government debt. Despite this relief, the crisis intensified. In two nail-bitingly close elections held in the summer of 2012, the country came close to a catastrophic “Grexit” from the single currency.

If Greece has come a long way from those dark days, it is still far from being able to support itself financially. Like the rest of southern Europe it has gained as investors take a more favourable view of the euro zone and also anticipate possible quantitative easing by the European Central Bank. Yet though Greek ten-year bonds fell this week to below 6%, that is still much too high to be affordable for a country forecast by the IMF to grow by only 0.6% in 2014 and experiencing deflation (with prices falling by 1% in the past year). Greece remains in the dock compared with Ireland and Portugal, the second and third countries to require bail-outs, whose ten-year yields are less than 3% and 4% respectively.

Indeed, Greece would be quite unable to access the markets but for the massive support it continues to receive from the rest of the euro area. Despite the default, public debt, at 175% of GDP this year, is much higher than before the first bail-out. That burden is made bearable only through concessions by the European lenders who now hold most of the debt. Their loans are at ultra-low interest rates. They have been extended to such an extent that the average maturity of Greek debt is extraordinarily high, at 17.5 years. European countries like Germany have in effect restructured their lending to Greece without having to admit this awkward fact to voters by formally forgiving some of it.

Even more help will be necessary. The IMF continues to insist that euro-zone governments will have to make further concessions if Greek public debt is to be put on a sustainable trajectory. The fund believes that relief worth 4% of GDP is needed in the next year or so if the objective of debt of 124% of GDP by 2020 is to be achieved, with more to come if this is to be yanked down below 110% by 2022.

Even with extra help the targets are heroic. Greece has only just managed, in 2013, to achieve a surplus on its primary budget (ie, excluding interest payments), of 1.5% of GDP. That was higher than expected and is a massive improvement on the dire position in 2009 when there was a deficit of 10.5%. But if the debt goals for 2020 and beyond are to be met that surplus must rise to 4.5% of GDP by 2016 and be sustained at 4% in the 2020s.

That is not wholly infeasible: Belgium managed to run an average primary surplus of 4.3% of GDP between 1987 and 2008. But it is a tall order for a country that has spent over half the time since it became independent in 1830 in default. More than this week’s foray into the markets, what matters is whether Greece has really changed its ways. That seems far from clear. The latest slug of bail-out money has taken ages to be approved because the regular programme review by the IMF and European authorities got bogged down in ill-tempered negotiations as the government resisted more reforms.

Yet adopting those reforms and sustaining previous efforts are essential. The IMF has estimated that reforms could boost GDP by 4% over five years and by 10% in the long term. The reform fatigue in Athens may be understandable but it betrays a reluctance to accept that the country was the architect of its misfortune. Greece entered the crisis as a dysfunctional state with an impaired economy. It is hard to imagine the country sustaining a decade or more of self-denial if left to its own devices. The grumpy political mood in Greece suggests that it has not fully got the message about how much more has to be done.