Greek economy: will reality collide with fresh optimism in Athens?
Odos Lekka, a narrow street in the commercial heart of Athens, has not been this bustling in a decade.
Workers are busy refurbishing a drab warehouse left unoccupied during Greece’s prolonged recession. A clutch of new cafés and a smart boutique hotel, one of scores that have sprung up in the capital to cater for a surge in tourism, suggest that Lekka, a stone’s throw from the parliament building, is moving upmarket as the country’s economy gradually recovers.
Alecos, a carpenter, says: “There wasn’t any work round here for several years because of the crisis, but it’s quite different now. I’ve more job offers than I can handle. New businesses are opening and old ones are getting a makeover.”
The burst of optimism is a stark contrast to the experience of recent years. Almost 30 per cent of shops in the area, from high-end retailers of international brands to outlets selling handworked silverware, shut down or changed hands during the country’s deepest recession in memory. Property prices plunged as Greece came to the brink of crashing out of the euro in 2015.
It took Greece nine years to escape from a grinding recession following the 2008 global financial crisis, but the recovery has been weak. This year will test whether the country’s fresh political leadership and renewed business confidence can overcome deep-seated problems holding back fast growth.
This year property prices have increased by about 10 per cent, and commercial rents are rising. A sweeping election win by the centre-right, pro-business New Democracy party in July boosted business sentiment. The Athens Composite index of leading shares rose by 49 per cent in 2019. Bond yields have tumbled — the yield on Greek 10-year debt, which spiked to nearly 15 per cent in 2015, fell to 1.1 per cent in November, below Italy’s.
Prime Minister Kyriakos Mitsotakis says his election six months ago was a “turning point” for Greece following four years of government by the far-left Syriza party, which took the country to the brink of euro exit before accepting but only half-implementing the instructions of international creditors.
“We’ve left behind a difficult period, and I think this was an election that essentially symbolised the end of an era that really started with the onset of the economic crisis in 2009, and my view is that this crisis lasted much longer than it should have lasted,” he says in an interview with the Financial Times in his office in Athens.
Yet for the all the current upbeat mood, it is not clear if the new government will really be able to attract the foreign investment that the Greek economy needs to accelerate growth and recover years of lost output.
“Mitsotakis really understands business,” says Miranda Xafa, an economist and former IMF official. “He understands very clearly what needs to be done. But I think he is quite optimistic about how quickly he can get this done. He thinks he can turn the page and it will be another Greece.”
An athletic 51-year-old, Mr Mitsotakis has spent years, if not decades, training for the top job. He is Greek political royalty. His father was prime minister in the early 1990s. His sister Dora Bakoyannis was foreign minister and mayor of Athens, a post now held by his nephew. He studied abroad, like many of the Greek elite, in his case at Harvard and Stanford. He entered parliament in 2004 but his early career was in consulting and private equity and he still talks of “growth deltas” like the McKinsey staffer he once was. He won the leadership of New Democracy in 2016 and steered the party to the centre ground, tamping down its nationalist wing.
He may have the political lineage, but Mr Mitsotakis has been unconventional, say his aides, in that he actually prepared for the job of prime minister. In the run-up to the election he lined up more than 20 foreign-trained technocrats to take over key posts in a New Democracy administration. After taking office he took advantage of lower borrowing costs and better than expected revenues to cut taxes on corporations, property, dividends and personal incomes. He stepped up efforts to clean up the banking system and kick-started large-scale investment projects mothballed by the outgoing anti-capitalist administration.
Despite its tepid recovery, Mr Mitsotakis now reckons Greece can enjoy economic growth this year of 3 per cent.
“I think we are in the process of breaking out of a vicious cycle, and sort of putting Greece into a virtuous cycle,” he says.
“There’s no doubt [about] what I hope will happen to the country, and I think what we really need is radical change, to really turn Greece into a true success story. We cannot just afford to muddle through, we’ve lost too much time and too much GDP, frankly, and too much energy as a country to do that.”
But Greece’s problems remain deep-seated and the IMF and European Commission, which keep Athens under close monitoring after their bailout ended in 2018, are more sceptical about the country’s prospects. They predict growth in gross domestic product of 2.3 per cent this year but a slowdown in 2021.
“Growth prospects are weighed down by significant crisis legacies (high public debt, high non-performing loans, over-indebted borrowers), low productivity, a dearth of investment, a weak payment culture and adverse demographics,” the fund concluded in its latest assessment, in November.
A decade of change for Greece
From bailout to budget surplus
Greece signs up to a €110bn rescue programme backed by the EU and IMF
Greece avoids default by restructuring almost €200bn of sovereign debt. Bondholders took a 53 per cent haircut on their holdings, reducing the country’s debt pile by €110bn
The radical leftwing Syriza party led by Alexis Tsipras wins a general election pledging to rip up Greece’s second €130bn bailout agreement
Greek voters reject a third bailout deal at a referendum, pushing the country to the brink of a disorderly exit from the euro. Within days, the Syriza government abruptly changes course and accepts a new EU-backed €86bn rescue programme
Greece successfully leaves the third bailout programme, outperforming tough budget surplus targets
The pro-business centre-right New Democracy party wins a snap general election
The government and outside economists pinpoint the biggest challenge as a lack of investment, which collapsed during the crisis and failed to rebound. Investment as a share of gross domestic product was the lowest in the EU in 2018 and even now is only running at 12 per cent, compared with a eurozone average of 21 per cent. Domestic savings are too modest to provide the capital investment the economy needs, which leaves Greece highly dependent on foreign direct investment.
Mr Mitsotakis and his ministers are pinning their hopes on persuading foreign investors to come to Greece. The premier hails a “dramatic shift” in investor confidence since his election. In his first budget announcement in September he cut taxes in a package worth €1.2bn. The government is aiming for a 5 percentage point reduction in social security charges by 2023 to improve Greece’s labour competitiveness. But the government is still waiting for the improved mood and its early actions to translate into higher investment and faster growth.
“There is no reason why it won’t happen,” says Mr Mitsotakis, noting that barely a day goes by without him meeting investors. “But you know, it remains to be seen.”
One issue that concerns investors is Greece’s reputation for raising bureaucratic obstacles to investment and allowing political interference in the judicial system, often at the behest of the country’s powerful interest groups. These range from leading business groups to associations of professionals and public sector labour unions.
“Local private sector players want to limit competition so they can make excessive returns. They are adept at putting pressure on the administration to block potential competitors, whether domestic or foreign,” says one former IMF official.
Labour unions have managed to delay restructurings and privatisations of state-owned corporations, among them almost 20 lossmaking companies overseen by the Hellenic Corporation of Assets and Participations set up at the request of the EU during Greece’s bailout to overhaul management and increase revenues for the government.
A crunch point may be approaching, however. “This year will be key. If they don’t do some serious confrontation with special interest groups, in 2020 it’s never going to happen,” the former IMF official says.
Mr Mitsotakis appointed Adonis Georgiadis, a former businessman and political bruiser from the right of the party, as economic development minister to spearhead the drive for investment and clear away bureaucratic obstacles to new projects.
“We think 2020 is the year that we will prove we mean business,” Mr Georgiadis says.
There are low-hanging fruit. The previousfar-left administration blocked or dragged its feet on a number of projects, including a new gold mine in Halkidiki in northern Greece, a further investment by China’s Cosco in Piraeus port, and the long-awaited redevelopment of the site of Athens’ former international airport.
The latter, Hellinikon, is totemic of the difficulties of doing business in Greece — and of the missed opportunities. The old airport closed in 2001 and the brownfield site has remained idle ever since. Two foreign investor groups pulled out of the project, leaving the Greek partner to raise almost €1bn in debt and equity financing in the final quarter of last year. Construction of a casino and entertainment complex — the first phases of a mammoth redevelopment worth €8bn over eight years — should finally begin in the first quarter of this year.
The government hopes the long-overdue arrival of the bulldozers on the site will provide a psychological shock to a country more accustomed to delays and paralysis.
“It is a sign that we want to show to the rest of the world that we mean business and that we can deliver,” Mr Georgiadis says.
Greece will also need hundreds of millions of euros of rapid investment in renewable energy. The government intends to shut down all of its lignite-fuelled power plants by 2028, which currently provide about 50 per cent of electricity. Mr Mitsotakis said he wanted Greece to be “at the forefront of the renewable revolution”.
But a shift away from dirty coal to wind and solar also requires a deep restructuring of Greece’s biggest company, the Public Power Corporation, which is majority-owned by the state. PPC has been heavily lossmaking, partly because of billions of euros in customers’ unpaid bills during the crisis.
Lossmaking public companies cost the taxpayer €18bn from 2012-18, according to IMF calculations.
The other big problem weighing against Mr Mitsotakis’s ambitions is Greece’s banking system, which struggles to provide credit to the real economy. Greece’s four big banks are the least profitable in the eurozone and still stuffed with non-performing loans from the crisis. NPLs account for more than 40 per cent of assets, despite recent progress in cleaning up the books. By way of comparison, in Italy the number has dropped below 9 per cent.
The EU in late 2019 gave Athens approval for Greek banks to offload about half of their bad loans to a state-backed investment vehicle. But sooner or later the banks will have to address the other half, unless they suddenly return to healthy profitability.
One answer put forward by the government is a radical overhaul of Greece’s insolvency laws, to make it easier for banks to foreclose on homeowners and to close down or restructure zombie companies. Complex and disparate bankruptcy rules — and extensive provisions for forbearance — have left Greece with a massive overhang of household and corporate debt, which is weighing on the economy. A new insolvency regime would make it easier for banks to recover bad debts, increase the value of their NPL portfolios and allow indebted Greeks to make a fresh start. But any move to curtail forbearance, particularly on home loans, could prove highly contentious and will become another test of Mr Mitsotakis’s resolve.
Unless the government’s early moves substantially lift the economic growth rate, it could prove difficult for the prime minister to persuade his eurozone partners to give Athens more fiscal room for manoeuvre.
In return for partial debt relief from the eurozone when Greece left its bailout programme in 2018, Athens agreed to run a primary budget surplus (before interest payments) of 3.5 per cent of GDP until 2022, and then an average of 2.2 per cent thereafter until 2060. The IMF and many economists contend that such a high surplus crimps Greece’s growth. Mr Mitsotakis has vowed to renegotiate the target. Although Greece’s mountainous public debt still stands at 177 per cent of GDP, he contends that lower interest rates are here to stay, reducing the repayment burden. He was rebuffed by eurozone finance ministers in July, but will push again in the spring, in the hope that reform efforts will have begun to show.
“We are aware of the dynamics, and we are aware of the fact that there is a credibility gap that needs to be bridged,” Mr Mitsotakis says. “And this is exactly what we’re doing.”
If the economy disappoints, it could also allow the Syriza opposition a chance to regroup. Alexis Tsipras, the leftwing firebrand who became more pragmatic in power, has adopted a low profile since his election defeat. But the party is seeking to broaden its appeal and soften its ideological edge.
“We’ve done a lot about ideology. It is time to get practical,” says Effie Achtsioglou, a former labour minister and Syriza rising star.
For the moment, Mr Mitsotakis is enjoying a degree of political strength that he says is rare in Europe — “a single one-party government with an absolute majority, so with a clear mandate to deliver change [and] no complications regarding coalition-building”.
Now his task is to “make sure I deliver change, that I am true to my principles, and that I basically succeed where all other prime ministers during the crisis have essentially failed”.