Investors are becoming increasingly bullish on the long-term Greek outlook, with yields of Greek ten-year bonds now broadly in line with those of their Italian counterparts. In total, Greek yields have fallen by just under 300 basis points since the start of the year, while the spread has fallen by 1.6 percentage points.
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The more bullish stance reflects investors reassessing the level of risk associated with the euro area’s most indebted sovereign, brought about by the remarkable turnaround in the Greek fiscal position since the crisis. Indeed, while Greece ran a primary budget deficit worth 10% of GDP in 2009, it now runs a primary surplus of 4%. Even when interest payments are included, the government’s receipts now outweigh its expenditure. As a result of the improved budget balance, Fathom’s proprietary probability of default indicator dropped to 14% last month.
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Of course, public sector debt still stands at roughly 180% of GDP, with nominal debt in excess of €30,000 per capita. For debt to remain under control, Greece will have to maintain strict fiscal discipline for the foreseeable future. Even with this, the country will remain reliant on maturity extensions for its official sector debt.
Also key to the outlook for Greek debt sustainability is economic growth. The finance ministry’s budget forecasts assume that the new government’s policy pledges will boost the economy in the near term, with growth expected to accelerate to 2.8% next year and the unemployment rate (which remains in double digits) predicted to fall substantially. With economic output still roughly 25% below its pre-crisis peak, there is likely to be a substantial degree of slack left in the economy, suggesting that a pickup in growth is not entirely unrealistic. However, if growth does not pick up as the government predicts, then the government is unlikely to hit its fiscal targets in the near term.
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