Looming elections in Greece pose big risks for investors
Victory for New Democracy, the main centre-right party, could reignite volatility
Greek elections are around the corner. Investors should be optimistic but not complacent.
I believe New Democracy, the main centre-right party, will win the poll on July 7, with leader Kyriakos Mitsotakis becoming the next Greek prime minister. Yet, with current PM Alexis Tsipras in opposition, Mr Mitsotakis’s attempts for bold reforms will raise social tensions — something that Mr Tsipras had kept firmly under control.
It was a devastating fire at Mati, south of Athens, in late July last year that led Mr Tsipras to abort the national elections he was rumoured to be considering for September 2018. Polls would have been very timely as Greece had emerged from its third international bailout in August; domestic sentiment was positive after yet another record year of tourism; and his trips to London and Brussels had proved successful.
However, the destruction caused by the fire, exacerbated by officials’ inability to deal with the crisis, put those plans to rest.
This year I had expected Mr Tsipras to delay the elections until after the summer, so as to capture the tailwinds of yet another strong tourist season adding a further boost to growth. James Carville’s “it’s the economy, stupid”, coined for Bill Clinton’s 1992 US presidential campaign, could not be more relevant.
However, the EU election results in May, with ND at 33 per cent and Mr Tsipras’s leftwing Syriza at 24 per cent, tipped the balance towards an earlier poll. The margin between ND and Syriza has remained broadly unchanged for the past year, but Mr Tsipras had expected a narrowing following an increase in public-sector employment and some fiscal stimulus measures in the weeks before the EU election.
Those measures — tax breaks and bonuses for pensioners, in spite of austerity mandated by international bailouts — are not only characteristic of the pre-electioneering campaign, but also another sign of the shifting dynamics within the EU. In the next phase of the bloc’s development, power will be moving from the centre to the national governments, as already witnessed with Italy and France. Such moves are likely to be accelerated, as sociopolitical concerns prevent Brussels from exerting heavy influence, and as we get closer to the departure of German chancellor Angela Merkel.
This will obviously have significant and broader repercussions with some countries like those in the New Hanseatic League, a group of hawkish governments that takes a sceptical stance towards the vision of closer EU integration of French president, Emmanuel Macron.
Why should investors be optimistic? The existential issue of “Grexit” is behind us. The economy has stabilised and is growing, albeit close to 2 per cent given the constraints of a primary budget surplus, excluding debt servicing, of 3.5 per cent of annual economic output up to 2022.
Market sentiment has improved considerably as evidenced by recent successful bond issuance by the government. Ten-year bond yields are at all-time lows of 2.5 per cent and ASE, the local stock market index, is up more than 35 per cent this year. Furthermore, the manufacturing PMI numbers have been on an upward trajectory with the strongest levels for nearly 20 years, signalling a continuing improvement in the Greek manufacturing sector
Within services, tourism — which accounts for more than 20 per cent of gross domestic product — continues to flourish. This has been the key driver for international investors and private equity houses focusing on non-performing loan packages, along with assets in hospitality and real estate.
Yet, it could have been better if Greece were to be compared with Spain or Ireland. Foreign direct investment for 2018 may have surpassed €3.6bn, up 13 per cent year on year and three times higher than 2015, but high taxes, dense regulations and lack of structural reforms have held FDI back. Furthermore, non-performing loans still plague bank balance sheets, hindering them from helping the economy to grow.
Why should investors not be complacent? As with the experience of Gerhard Schroeder in Germany and Tony Blair in the UK, it tends to be easier for left-of-centre governments to pass through tough legislation. Likewise, Mr Tsipras has managed to pass tough measures with practically no social unrest for the past few years. This would not have been the case under any right-of-centre government.
Hence, investors should be cognisant that an ND government led by Mr Mitsotakis could reignite near-term volatility and social unrest. The Greek economy is not in the state of emergency it was after the eurozone crisis and hence the reforms will not be as punitive. But they will give the opportunity for grass roots supporters of Syriza, alongside trade unions, to create friction.
More importantly, it would place Mr Tsipras in the role where he excels the most — as leader of the opposition.
Is Mr Tsipras likely to win? If he had held off until September with the summer breeze to help him out, I believe he could. But now time is short and momentum is building for Mr Mitsotakis. Would a change in government necessarily derail the recovery? I do not think so, but the late summer meltemi will not be all smooth sailing. Ten-year bond yields, at 2.70 per cent, look expensive.