Greece Turns Triumph Into Tragedy

Six Months Ago, Greece Seemed Past the Worst: The Mood Today Is Different

http://www.wsj.com/articles/greece-turns-triumph-into-tragedy-1417988877

The Wall Street Journal

By SIMON NIXON

Dec. 7, 2014 4:47 p.m. ET

Greece’s latest drama has the potential to turn into a tragedy. Six months ago, the country seemed to be past the worst and there was widespread optimism among policy makers and the markets that the overhauls had laid the foundations for an investment- and export-led recovery.

Foreign investors had snapped up Greece’s first government-bond issue since the start of the eurozone debt crisis and had poured fresh capital into the banking system.

The long-stalled privatization program was attracting serious expressions of interest from global companies and hedge funds, and private-equity groups were on the hunt for bargains.

The mood today is rather different. If anything, the economy has outperformed expectations, growing 0.7% year-to-year in the third quarter, the fastest growth of any eurozone member, boosted by tourism.

Next year, Athens expects growth of close to 3%. Unemployment is finally falling and the country is delivering both a primary-budget and current-account surplus.

Yet the Greek 10-year bond now trades at a yield of 7.12%, down from a recent peak of 8.8% but still far above the summer low of close to 5.5%. The Greek stock market has tumbled 12.3% from a year ago, Greek banks experienced a worrying deposit outflow in November and retailers say sales dived in recent weeks.

The gloom reflects political uncertainty. Over the past few months, Greek politicians and the so-called troika of international lenders—the European Commission, European Central Bank and International Monetary Fund—have contrived to put what progress Greece has achieved in doubt. The country now stands on a knife’s edge.

It is still possible that decisions over the coming days and weeks can return Greece to the stable path it was on before the radical leftist party Syriza topped the European Parliament elections in June, setting in motion the current turmoil. But the possibility diminishes by the day.

For this, Syriza leader Alexis Tsipras must take most of the blame. He spooked markets by turning a forthcoming parliamentary vote to elect a new president of Greece—a largely ceremonial position—into a vote of confidence in the government that he hopes will spur early elections and catapult him into office.

Syriza has recently been trying to rebrand itself to investors in New York and London as a mainstream pro-European party. Yet Mr. Tsipras has opposed virtually every overhaul and budget cut, standing consistently on the side of vested interests.

By refusing to cooperate with the government even on overhauls of the public administration and constitution that he accepts are urgently needed, Mr. Tsipras appears to embody all the worst aspects of the political culture he says he wants to change.

His economic strategy amounts to big increases in public spending, renationalizations and restoring public-sector jobs to be funded by debt relief from the troika—a program guaranteed to set Greece on a fresh collision course with the rest of Europe.

Listening to Syriza’s strategists, it is hard not to conclude that Mr. Tsipras would be the Hugo Chávez of the Balkans, his program modeled on that of the former Venezuelan leader.

Prime Minister Antonis Samaras must share some of the blame for the market’s loss of confidence. His ill-judged response to the Syriza threat has undermined the trust of investors and the troika. In June, he effectively fired the head of the tax administration, which troika officials suspect was evidence that Athens was going soft on tax evasion. He also shuffled his cabinet, promoting old-style populists to key posts.

Most damaging, Mr. Samaras overplayed his hand when he said in October that Greece would exit its bailout program early at the end of this year, putting itself at the mercy of markets. The markets quickly gave their verdict, tumbling on fears that, freed from the conditionality of official loans, Greece would abandon its overhauls and fiscal discipline.

Indeed, Mr. Samaras appeared to confirm those fears when he bypassed Greece’s official lenders by presenting a 2015 budget based on optimistic forecasts direct to the Parliament. He then extended the time for citizens to pay overdue taxes to 100 months from 12 months, again without troika agreement, raising further doubts about his commitment to overhauls. Lawmakers passed the budget on Sunday.

The troika itself has hardly been blameless. The IMF in particular continues to extend its dismal record in Greece, following years of botched forecasts, misguided policies and unnecessary and damaging delays.

For the third time in three years, the IMF is holding up a crucial bailout review by pushing for further deep spending cuts that Athens insists will prove as unnecessary as they did in 2013 and 2014. It is also demanding deep overhauls to pensions and the tax system on a timetable Athens believes isn’t politically realistic.

The IMF may be right that this may be a last chance to exert real pressure on Athens to respect overhaul commitments—that if, following the current review, Greece is allowed to switch from a bailout program to a precautionary credit line the troika will have less power to influence Greek decision-making. But other troika officials increasingly fear that the IMF’s intransigence risks deepening the political uncertainty in Greece.

Can Greece get back on track? Given how much time has been lost in the negotiations, it will clearly need some extension to the current program to enable it to meet its existing commitments.

But Athens is hopeful that if it secures a deal in the coming days that allows Greece to exit its program with a precautionary credit line early next year, it could yet gain the 180 parliamentary votes it needs to elect a new president and avoid early elections.

Such a deal inevitably would require a leap of faith from the troika. Mr. Samaras could certainly make that leap of faith easier by making credible commitments to use the political space he gains to reinvigorate his overhaul efforts rather than engage in further populist electioneering. If the troika fails to agree to a satisfactory deal with Mr. Samaras, it should brace itself for further political instability—followed by a far-less-satisfactory deal with Mr. Tsipras.

Write to Simon Nixon at simon.nixon@wsj.com