There are two factors absolutely tearing into Greek markets this week. The Athens Stock Exchange is down 6.25% today, and 23.24% since January.
One of those factors is the seemingly unstoppable rise of SYRIZA, Greece’s anti-establishment and anti-austerity radicals. They’re establishing a solid lead in the polls, and given the unpredictable nature of Greek politics, they could upset the market in a massive way.
But there’s another major factor. Despite Greece’s pretty grim economic state, Prime Minister Antonis Samaras wants to end the country’s international bailout early, without taking the €8.2 billion ($US10.44 billion) still left in the package.
In a note, Capital Economics’ Sarah Pemberton explains the government’s logic:
“There may also be a hope that an early exit would further boost market confidence in Greece’s economic and fiscal outlook. After all, Ireland and Portugal’s exits from their programmes appeared to have positive market effects.”
Greece’s 10 year bond yields beg to differ with the government, and are definitely not seeing any positive market effects.
Bond yields are climbing way back up above 7%, the highest level in six months.
The Greek government has already tentatively experimented with going back to the bond market, issuing small amounts of debt. And though yields are way down from where they were during the euro crisis, it’s paying far more interest on that than other European finance departments.
Government bond yields (the most common measure of how much it costs for a state to service its debt) are still far above Portugal or Ireland’s, when those countries exited their bailouts.
There’s also a vicious cycle here. A plan to exit the bailout early sends bond yields upwards, making the prospect of Greece going it alone increasingly scary. So, bond yields go up some more.
This morning, A Fitch report came out this morning saying that the “large amounts of unreserved problem loans leave the four major banks’ balance sheets vulnerable to developments in an improving but still very weak economy.”
Greece’s big listed banks are right in the middle of Wednesday’s brutal sell-off, with the National Bank of Greece, Alpha Bank, Pireaeus Bank and Eurobank’s share prices all dropped by more than 10% during the day. The problem is, if even Germany is flirting with recession, it seems increasingly unlikely that we’ll even be able to call Greece’s economy “improving” at all in a few months.
So what Samaras is talking about could be extremely dangerous. Greece’s economy is shattered in a way nowhere else in Europe has seen: it’s nearly 30% smaller than it was in 2008, and is barely out of a recession that’s lasted for almost seven years.
Given what’s happening today, and the slump the eurozone seems to be heading into, people might soon wonder what on earth Samaras was thinking.