Suddenly, Greece staying in the euro zone seems a sure bet

December 18, 2012
Obsession
Euro Crunch
December 18, 2012

Tomorrow, the European Union and International Monetary Fund will juice Greece’s ailing finances with a long-awaited €34.3-billion (US $45.2-billion) rescue loan, marking their second bailout of the struggling republic. Some €16 billion euros of that is earmarked to recapitalize Greek banks, which were forced to accept a write-down last spring as part of austerity measures. Looking into the first quarter of next year, Greece is set to receive another €14.8 billion, provided it continues to meet the terms of the EU-IMF assistance program.

If recent developments are anything to go by, so far, so good. Last week, Greece paid €11.29 billion for €31.9 billion of its own debt as part of a buyback program stipulated by the IMF’s testing of Greek resolve to shrink its debt-to-anual gross GDP ratio to less than 110% by 2022. And show resolve it sure did: the Greek government offered higher-than-expected rates of 60-70%, providing a windfall for funds that bought Greek debt at an even more dramatic discount last summer, reported the New York Times.

That risk premium may be fading, though. On Tuesday, ratings agency Standard & Poor’s upgraded its rating on Greek debt to B-, raising it six notches and scooping it out of the “selective default” category. Greece also announced the sale of €1.3 billion in a treasury bills auction, unloading them at 4.11% interest, down from 4.20% on November 13.

And on other fronts, Greece has further demonstrated its commitment to meeting austerity conditions, auguring continued access to EU-IMF lending. For instance, the government announced today that its January-November deficit came in at €12.9 billion, compared with €21.5 billion during the same period last year. And just last week, Greek officials announced a new tax bill that would hike rates on middle- and high-income families, with the aim of raising €2.5 billion and tightening its collection net, something that has proven woefully full of holes in the past (PDF). The tax will also up the rate on corporate profits to 26%, from 20%.

And, just like that—Grexit, schmexit.

But in many ways, Greece’s flurry of upbeat news signals confidence in euro zone unity—and not better days ahead for the actual people of the Hellenic Republic. The Wall Street Journal warned Tuesday of “the harshest winter of its three-year-old debt crisis” as Greece slides into a full-blown depression, marked by a 20% slump in economic activity since four years ago. This grim picture could be further exacerbated by roiling political battles.

As radical left-, and, to a lesser extent, right-wing parties gain popular traction, the current government coalition looks ever-more flimsy, and its resilience could be tested by a vote mere months from now. Jens Nordvig gives two-thirds odds to the possibility that far-left Syriza, which is vocally anti-austerity, could oust the current coalition between relatively conservative New Democracy and Pasok in an early election. And if that happens, that B- upgrade might come out looking a tad premature.

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