Greece may be turning a corner though it will be a rocky road to recovery says J.P. Morgan A.M.

6th March 2013

There may be emerging grounds for optimism about the Greek economy according to J.P. Morgan Asset Management. In a note to investors,  Maria Paola Toschi & Tom Elliott, global strategists at the fund manager say the country may be on a bumpy road to recovery.

It says that this is important for the global re-risking investment theme.  It says: “If Greece can present itself as a recovering economy, having taken the Troika’s medicine of fiscal austerity and supply-side reform, the reform agenda of the European Central Bank (ECB) and International Monetary Fund (IMF) will be given a further boost. If Greece stumbles, the vested interests in other peripheral eurozone nations will be encouraged to delay supply-side changes and with it growth and debt sustainability.”

The strategists point out various grounds for optimism. It says in January, the Greek Government won a highly symbolic battle against Athens Metro workers over pay scales. It adds: “Disruptions and strikes persist, but the government has an important victory under its belt.”

The note says that despite the economy entering its sixth year of recession, the Foundation of Economic and Industrial Research consumer confidence index is near a two-year high. It points out that three Greek companies, OTE, Fage and Titan, have been able to issue debt on capital markets in recent months while the government is forecast to run a primary budget surplus this year and a return to GDP growth is expected in 2014.

The analysts add: “This has allowed Greece to join in the ‘risk-on’ rally of recent months. Greek ten-year government bond yields have dropped below 10 per cent, while the Athens Stock Exchange (ASE) main index has rebounded by roughly 10 per cent year to date, and more than 100 per cent since June 2012. Standard and Poor’s has upgraded Greece’s credit rating to B-minus, with a stable outlook. Commentators are no longer predicting Greece’s imminent exit from the euro.”

It is not all good news. J.P. Morgan notes that the labour market remains weak. At the end of 2012 the unemployment rate climbed to 24 per cent, which, it says, clearly hinders the restoration of domestic demand.

It adds: “Average unit labour costs have declined 14 per cent since the 2009 peak. The effect of this, together with weak domestic demand, has been a steady improvement in the current account deficit, which fell to 5 per cent in September 2012, from 16 per cent in 2009. Tackling the persistent current account deficit is key to long-term growth, and to debt sustainability, so this is welcome news.”

Supply-side reform

The note continues: “It is not only the Athens metro workers who are being asked to reform. The Troika has made quite granular recommendations, which include specific headcount reductions in the civil service, and improving the efficiency of court proceedings.

“Supply-side reforms also include the liberalisation of regulated professions, much of the retail sector and of tourism. Steps have been made to assess tax evasion, and clarify land ownership. The potential revenue to be gained is substantial: estimates suggest current annual tax revenue losses are in the region of EUR 30 billion.

“Privatisations have not yet been started. However, the government recently presented a list of state-owned companies, golden shares (mainly in utilities) and properties to sell. On the downside, proceeds from these privatisation initiatives may only amount to EUR 23.5 billion through 2020, half of what was initially projected.”

The note adds that bank recapitalisations should be finalised by the end of April 2013. Total capital needs are estimated at EUR 40.5 billion, of which EUR 27.5 billion corresponds to the four biggest domestic lenders. Private shareholders should cover at least 10 per cent of new common equity capital to ensure the credit institutions are privately run, it says.

The note points out that after a long period of a decline in banking deposits, deposits started to recover in the second half of 2012 and inflows also came from abroad. “The successful conclusion of the government bond buyback programme, at the end of 2012, has helped to make debt-to-GDP targets, set by the Troika, achievable goals. To date, 80 measures of spending cuts have been identified, with the majority of savings coming from public wages and social spending. The 2010 pension reform should reduce public pension spending as a percentage of GDP from 17 per cent to 14 per cent in 2013.”

*Sources: ECB Monthly Bulletin, January 2013, and IMF Country Report, January 2013.

The manager also argues that the contagion risk for Europe has declined. The note says: “Just as Greece is contributing to the broader ‘risk on’ environment, so the downside risk to its neighbours’ banking systems has been substantially reduced. Not only is Greece now less likely to leave the euro, which would have caused chaos among its trading partners, but the March 2012 restructuring of privately held Greek government debt has reduced a great deal of uncertainty over the real value of the bonds on banks’ balance sheets. Losses have been crystallised.”



10 thoughts on “Greece may be turning a corner though it will be a rocky road to recovery says J.P. Morgan A.M.”

  1. forbin says:

    Hello Shaun,

    Film review – Funding to buy

    Remember no Banks were harmed in making this bubble…..


    1. Anonymous says:

      Hi Forbin

      Better news for you today on the commodities market as the price of Corn futures dropped by over 2% to under US $5. Now whether that will reach popcorn at the supermarket……

  2. coypond boy says:

    Hi Shaun,

    outside of Dublin in areas such as County Cavan and Leitrim where too much property was built some properties are 90% below their 2006 peak, we were looking at a 3 bed apartment for 30k euros as a holiday let, originally on for 400k euros in County Leitrim. Plenty of other properties in a similar position in this area.

    1. Anonymous says:

      Hi Coypond Boy and welcome to my part of the blogosphere

      Thank you for the information it was an extraordinary boom and bust in those places wasn’t it? I used to follow events on the excellent Nama Wine Lake blog but sadly it closed last year.

      Mind you here is a thought for you that the future may not be clear of economic clouds in a reply to me earlier on Twitter about Ireland.

      “Brenda Kelly ‏@BrendaKelly_IG 7h

      what’s notable though is that total lending to households fell back to lowest level since Jul 05 last month.

  3. forbin says:

    a 2nd thought ks

    the reason to not have house price inflation in any CPI/RPI measures is to allow the selling of inflated houses to each other as thats the only quick and easy boost we can do ……

    and possible the only economy we’ve got left…..

    oh and it helps the Banks…… erm , maybe thats the only reason…..


    Maybe we’ll turn back the hands of time
    Let’s go round again
    One more time, one more time, one more time

    Average White Band

  4. The King's Park says:


    I also caught the BBC Breakfast interview this morning and wondered if you were watching too!

    I couldn’t help but laugh at comment about rising house prices helping first time buyers. I worried about the guy who had bought a ‘dream home’ using help to buy and openly admitting he hadn’t budgeted for interest rate rises. How many thousands of others are in the same boat and what will the consequences be when they do rise as they must one day…

    1. Anonymous says:

      Hi The King’s Park

      The “experts” which are paraded by the BBC display a lack of expertise quite regularly I am afraid and I wonder what criteria are used. It is unfortunate I think when someone as in this instance gets free airtime and associated credibility to spout things like this and even worse when it is not challenged.

      As well as the line that it is better to pay higher prices in a rising market there was a “if it all goes wrong you can rent it out too”. Forgetting that presumably a lot of people would be trying to do that with the consequent effect of depressing rents assuming they could rent it out…

  5. Jim M. says:

    Hi Shaun,

    As your resident W. Ham fan may I just point out that the song, which has helped sustain we hardy souls through the vicissitudes of a precarious Premiership existence, was never intended as a Mission Statement for the UK’s elected government! In the same way that 1984 was never intended as an instruction manual.

    As for Forbin and Corn futures, supermarkets seem to have taken a leaf out of the Fuel Suppliers game-book and just opted for incremental increases as a default policy.

    Is it, I wonder, time for me to dust off the old Sergio Tacchini and slap a few politicians or are we still sticking to a policy of holding back?

    1. Anonymous says:

      Hi Jim M

      You may be amused to learn that I met a friend of mine last night who is a West Ham fan so I got a full update on the vicissitudes of being a fan of the Hammers! Actually he regretted getting tickets for the matches against the top teams for him and his son as he watched the Hammers mostly being outplayed. I did however point out that whilst Sullivan and Gold have their faults we were no longer discussing “where has the transfer money gone?” which became a staple of our past conversations. Also that you got a very cheap Olympic stadium…

      Let us hope for a bloodless revolution although I fear that Dickens was right when he called some of the political and bureaucratic class of his day Barnacles.

  6. Anonymous says:

    Hi Dutch

    Yes the regional patterns are very different which I why I contrasted what has overall been the weakest- Northern Ireland- with London. However if we look at the latest data on real wages we can see why house prices outside London have struggled until now. From the ONS earlier.

    “Relative to 2008, average real hourly earnings fell in the services
    (-6.9%), manufacturing (-5.6%) and construction industries (-13.4%), and by around 7.6% across the economy. By contrast, workers in the finance & business services industries – who experienced
    real wage increases relative to 2008 as recently as 2011 – had seen only a 4.2% fall in average real hourly pay in Q4 2013.”

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