It’s only been a few years since the horror movie of the threat of a Grexit ended, unfortunately, however, Greece’s creditors, investors and allies should start to worry about the country again, he emphasizes in his analysis, which is signed by Hugo Dixon , the Reuters agency.
A wiretapping scandal threatens the government of Prime Minister Kyriakos Mitsotakis and the country with prolonged political instability, it says, noting that this is not a repeat of the crisis that threatened to drive Greece out of the euro. However, the country’s high deficit and debt – at 189% of GDP – are a cause for concern at a time of soaring energy prices and rising interest rates.
“Earlier this month, the PASOK leader accused the country’s intelligence service of monitoring his phone. There was also an unsuccessful attempt by an unknown source to infect his phone with a type of surveillance software called Predator,” the agency notes.
“Kyriakos Mitsotakis, prime minister and leader of the center-right New Democracy party, said he was unaware of the wiretapping and would not have approved it if he had known about it. He fired the head of the Intelligence Service, while even the secretary general of the government, to whom he was reporting, resigned the EYP and who is the prime minister’s nephew. The government denies having bought or used the Predator,” Reuters reports.
Although K. Mitsotakis has a stable majority, he must call elections by August 2023 at the latest. These will be held with a simple proportional system, with the result that no party can obtain an absolute majority. Then there will be a second election, based on a new law that gives the first party a large number of bonus MPs.
Polls had previously indicated that Mitsotakis would win a majority in this run-off election – or close to it. But, after the outbreak of the scandal, this no longer seems likely, underlines Reuters. “Furthermore, it will be difficult for him to form a government coalition, as the most obvious government partner was PASOK, however, after recent events, this party will be extremely reluctant for a government alliance with ND.”
However, it will also be difficult for Greece’s largest opposition party, the leftist SYRIZA, to form a coalition, Reuters estimates. “Even if he were to try to strike a deal with PASOK, the two parties would probably not have a majority. They might only be able to get it through a completely unlikely coalition that includes the communists and the far right.”
There are other possibilities, says the agency’s analyst. “New Democracy could potentially replace Mitsotakis with a leader more attractive to PASOK. Another scenario would be for the parties to form a grand coalition, led by a technocrat. But neither scenario would lead to stability. In meanwhile, many questions about the surveillance scandal remain unanswered. If there are further damaging revelations, Mr. Mitsotakis may find it more difficult and more likely to seek an election.”
Greece’s investors and allies were generally enthusiastic about the Prime Ministership of K. Mitsotakis. His pro-business approach and promise to modernize the country attracted capital. His promise to pursue sound fiscal policy reassured the European Union, which owns the lion’s share of the country’s massive debt.
He managed the pandemic well, promoted the digitization of the state and took measures to exit the economy from the era of high pollutants. And his firm line against Russia’s invasion of Ukraine won praise not only in other European capitals, but also in Washington. He even recently made a speech at a joint session of the two houses of the US Congress.
But there are also criticisms that the Prime Minister was not fully determined to fight corruption. “In practice, he proceeded with amnesty in cases accused of disloyalty of financial sector executives, as well as tax evasion cases,” notes the Reuters analyst, adding that power was concentrated in Maximos and the EYP was transferred to the responsibilities of the Prime Minister.
At the same time, fiscal policy was looser than expected for a country that had recently experienced a deadly economic threat, the Reuters analysis noted. “The government has handed out a lot of money to support businesses and workers during the pandemic. It has also spent a larger proportion of GDP than any other EU country to protect consumers and businesses from the energy crisis, according to Bruegel, think think tank based in Brussels. The general government is set to run a primary deficit (before interest payments) of around 3.5% of GDP this year, according to Miranda Xafa, a Greek economist,” the agency points out.
Populism in view
A new government seems likely to be less business-friendly than the current one. “There is also the risk that Mitsotakis himself will take populist measures – spending more money to reduce the burden on energy bills – in an attempt to stay in power. As one electoral process follows another, all parties will they have an incentive to promise more public spending,” notes Dixon.
Greece’s creditors might argue that this doesn’t really matter. The country’s debt was restructured as part of the bailout programs. The country does not have to repay the principal or interest on the debt it owes to the EU until 2033. “Furthermore, although the debt is growing, the combination of inflation and economic growth means that the burden has shrunk as a percentage of GDP: the reason debt-to-GDP ratio decreased by 4 percentage points in the first quarter of 2022”.
Meanwhile, the EU may well want to avoid friction with Greece as Europe finds itself in the midst of a geopolitical and economic crisis, Reuters points out. “He has already suspended fiscal rules in the bloc, which are supposed to keep national debt and deficits under control. And the EU is much more worried about instability in Italy after the fall of Mario Draghi’s government.”
These factors shield Greece in the short term, however they may not be enough if there is a prolonged period of instability. After all, the government still needs to finance its ongoing deficit. From 2033 the bill for repayments and interest will skyrocket.
“There are already signs that investors are worried. Greek 10-year government bonds were yielding 3.9% on Friday morning, up 93 basis points from last month and 256 basis points higher than their German counterparts. While yields of government bonds are rising around the world, Greek debt yields have recently risen even faster than those of Italy’s, which rose 34 basis points to 3.6% last month.
Moreover, once the parallel geopolitical and energy crises are over, the EU may not be so willing to turn a blind eye to what is happening in Athens. Last week, the European Commission ended the “enhanced supervision” of the Greek economy, with the rationale that the country was definitively out of the “woods” of the crisis. It’s a decision he may regret at some point,” Reuters concludes.