New Democracy Meets Old Greek Problems After Mitsotakis Win

(Bloomberg) -- Kyriakos Mitsotakis will have to move swiftly to tackle a raft of lingering economic problems after being sworn in as Greek prime minister on Monday.

Investors expect the 51-year-old New Democracy leader, whose conservatives secured a healthy parliamentary majority in Sunday’s national election, to prove his business-friendly reputation is deserved. The former banker and management consultant will need to make good on pledges to address issues including government finances, soured loans and crippling bureaucracy, while working within the tight fiscal constraints creditors have set for the country.

Although he has inherited an economy on the mend and a stock market that’s soaring, they are rebounding from shrunken bases. Mitsotakis must ensure that Greece can attract the investment it desperately needs and create jobs as the country digs itself out of a financial crisis that has lasted more than a decade and took a toll on living standards.

“The weight of responsibility is heavy,” Mitsotakis said in his victory speech in Athens Sunday night. “I assume the burden with complete awareness of the situation the country is in.”

Greece’s economy expanded 1.9% in 2018 and is on track for about 2% growth this year. Since Mitsotakis’s victory in the May 26 European Parliament elections, the Athens Stock Exchange general index has risen more than 20%, while yields on 10-year bonds have fallen to record lows. Greece is planning a new bond sale by the end of the month to capitalize on that momentum to secure sustainable access to financial markets that was lost in 2010.

Read more: Europe’s Former Pariah Could Be Headed for New Era

The yield on Greece’s benchmark 10-year bond hit a record low on Monday, falling to 2.013% before edging up to 2.11%, while the Athens stock index dropped by as much as 1.8%.

Here are the five main issues Mitsotakis’s government will have to deal with from day one:

1. Fiscal Stability

Euro-area finance ministers gathering Monday for the last time before their summer vacation will have Greece in their sights. While the new government isn’t yet in place, the country’s creditors want to send a clear message that it has to stick to its commitment of achieving a 3.5% primary surplus every year until 2022.

Outgoing Prime Minister Alexis Tsipras’s decision to distribute handouts before the European elections raised doubts about Greece’s ability to meet its fiscal targets. The European Commission estimates that the freebies will lead to a fiscal cost of 1% of gross domestic product for both 2019 and 2020, meaning that creditors may ask the new government for additional austerity measures. The Tsipras administration had said that after the new benefits, Greece would fulfill its promises for this year, but might miss the 2020 target by some 400 million euros ($452 million) to 600 million euros.

Mitsotakis plans to rapidly legislate tax cuts that will come into effect from 2020 to spur economic activity and show investors that Greece is creating a more friendly environment.

The spending measures adopted by the Tsipras government -- and supported by opposition parties -- mean that Greece may not meet its budget target for this year, an EU official said Monday ahead of the Eurogroup meeting.

Ministers will not send any signals to the new government today, the official said. They will discuss the commission’s latest assessment, which indicates that fiscal policy is going in the wrong direction.

2. Bad Loans

Addressing about 80 billion euros in bad loans is a crisis legacy and the country’s biggest challenge. Lenders are speeding up their efforts to cut soured debt by selling portfolios of non-performing exposures, but they’ll probably need more tools to meet their ambitious targets of single-digit NPE ratios by 2021.

The Greek authorities are in talks with the commission for an Italian-style model for NPEs, but discussions are dragging on. The Bank of Greece also has a plan that foresees the transfer of bad loans to a special purpose vehicle. Tsipras’s government hasn’t submitted the central bank’s proposal to European authorities, but the new government is expected to do so soon, according to a person familiar with the matter.

The Greek benchmark banking index has risen 90% this year but investors worry that a failure to shrink bad loans may lead some banks to seek additional capital.

3. Investments

Mitsotakis’s target: doubling Greece’s growth rate to 4% in 2020. To achieve that he needs investments. To convince investors they can trust the country again, he wants to immediately proceed with the long-delayed Hellinikon project. The flagship venture envisages the transformation of the former Athens airport site -- more than two times the size of New York’s Central Park -- into a metropolitan park including luxury hotels, casino, marinas and apartments.

But that won’t be enough. The new government will have to deal with red tape, a sluggish judicial system and corruption, as well as speeding up privatizations, especially in the energy sector.

4. PPC Mess

Public Power Corp., Greece’s largest electricity provider, is struggling. Auditors in April questioned the state-run company’s ability to continue operations after it lost more than 500 million euros in 2018. The trend continued in the first-quarter this year with net losses widening to 205.1 million euros from 12.6 million euros in the same period of 2018.

The number one problem the outgoing government is leaving behind is Public Power, New Democracy Vice President Adonis Georgiades said in June. “It’s not just a company. If PPC fails, the country fails,’’ said Georgiades, who’s tipped as a possible Energy Minister in the new administration.

Greece’s next government must allow PPC “to act and operate as a company according to purely business criteria,’’ Chairman and Chief Executive Officer Emmanuel Panagiotakis told shareholders in late June. The entry of a strategic partner is an option for the company to reach its full potential, he said.

5. Administration, Security

Mitsotakis’s first draft law will be on the structure and functioning of the government. It will also include overturning legislation that allows the police to enter university sites only when invited. That would break a taboo where they are barred from accessing sites of higher education following the crushing of a student uprising against the country’s then military rulers in 1973.

Legislation to introduce tax cuts is expected to follow shortly afterward -- just ahead of parliament’s closing for a short break in August.

Mitsotakis’s aim is to signal change from his very first days in office.

“Starting tomorrow the sky will be bluer and the sun will be brighter,” he said in Athens Sunday night. “A new day is dawning for the country.”

--With assistance from Paul Tugwell, Eleni Chrepa, Antonis Galanopoulos and Nikos Chrysoloras.

To contact the reporter on this story: Sotiris Nikas in Athens at snikas@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Vidya Root, Iain Rogers

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