A file photo of a protestor waving a Greek National flag during an event in front of the parliament in Athens, Greece. (Photographer: Yorgos Karahalis/Bloomberg)

Risks at Home Mount for Greece in Its First Post-Bailout Year

(Bloomberg) -- After emerging from its steepest economic crisis in living memory, Greece still has a mountain to climb in 2019 if it’s to consummate its comeback with a sustained return to bond markets.

The government plans to issue as much as 7 billion euros ($8 billion) of new debt this year, using part of its cash buffer to repay some International Monetary Fund loans early. The finance ministry could test markets with a short or medium-term note as soon as this month if market conditions allow it, according to a person familiar with the matter.

Risks at Home Mount for Greece in Its First Post-Bailout Year

That’s going to be a tough ask. While the external market will continue to have a bearing -- as it did last year when contagion from Italy helped prevent Greek government bond yields from dropping -- Greece faces three main domestic risks in its first year since exiting its bailout.

1. Fiscal Derailment

Greece’s turnaround from fiscal basket case to a country that consistently posts budget surpluses has been the key factor letting it escape its bailout shackles. That’s now threatened by an activist judiciary, with the supreme court set to rule on the constitutionality of pension cuts legislated in 2013.

If the judges rule those pensions must be repaid, the one-time hit to the state’s finances could amount to as much as to 15 billion euros, or 8 percent of gross domestic product, according to two people with knowledge of the matter. There will be an additional annual cost to the budget of as much as much as 4 billion euros, they said.

Added to the risk from the courts, politicians are once more making big promises as elections loom. Prime Minister Alexis Tsipras’s Syriza-led government has announced an expansionary program that includes 25,000 new public-sector hirings, while opposition New Democracy party leader Kyriakos Mitsotakis has promised an ambitious tax-cutting agenda.

2. Crippled Banks

Although Greece’s economic recovery is gathering pace, with GDP growing 1 percent in the third quarter, it’s still rebounding from a devastating recession. One of the biggest constraints on future growth is the ability of banks to provide credit to the real economy.

The government is working on an Italian-style model to help banks cut their non-performing exposures, which stood at 88.6 billion euros at the end of June. Finance Minister Euclid Tsakalotos is expected this month to seek approval for the plan from the European Union’s state-aid authorities, according to a person familiar with the situation.

Risks at Home Mount for Greece in Its First Post-Bailout Year

There’s no shortage of initiatives to solve the problem. The Bank of Greece has submitted its own plan, which still needs to be approved by the government and could run in parallel with the finance ministry one. Still, bank shares linger near all-time lows, suggesting investors don’t believe they’ll avert the need to raise more capital.

A finance ministry spokeswoman was unavailable to comment on the NPE-reduction plans, while an official at the country’s debt management agency was unable to comment on the country’s bond-issuance plans.

3. Political Stasis

Greece’s elections, which must happen by October at the latest, don’t just threaten the government’s finances.

Although there isn’t a bogeyman frightening investors in the opposition wings, as there was in 2015 with Syriza, a change to the electoral law means an inconclusive result now could usher in an prolonged period of political uncertainty. This election will be the last in which the party coming first gets 50 extra seats in the 300-member legislature.

While polls indicate Mitsotakis’s party will win the election, they’re unclear whether he will get enough seats to form a majority or if he’ll need to put together a coalition. If he can’t command enough lawmakers to reinstate the seat bonus, parliamentary arithmetic will make it harder for any government to muster the votes to continue the bailout-era economic reform agenda.

©2019 Bloomberg L.P.