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With the Greek economy having regained its lost competitiveness upon joining the Euro; its current and fiscal account now in surplus and its government debt restructured; we think the emergence of Greece from recession should soon be officially confirmed. In view of Greece’s position at the epicentre of Eurozone stress, the Grecovery is likely to be the most important European economic and political event of 2014.

The Greek economy has had six years of recession, with real GDP having contracted 26% from its peak of €233bn in 20081.  Unemployment has now stabilised at 27% (from 10% in 2008) with wages for those employed down around 25% on average2. This painful internal devaluation has however resulted in Greece regaining all of its lost competitiveness since joining the Euro in 2000 (see Chart 1) with its current account moving from a deficit of 13% in 2008 to a surplus of 1% today3 and exports rising from 19% to 27% of GDP4. Foreign capital is returning to Greece with over €1bn of announced foreign direct investment or privatisations in the last month alone5. The Greek economy has actually been expanding on a quarter-on-quarter basis since Q2 20136 and the return to year-on-year growth is likely to be confirmed early in 2014 with the IMF officially forecasting a +0.6% increase 2014 on 20137 .

Chart 1. Greek competitiveness (real effective exchange rate) based on unit labour costs since joining the Euro in 20008

Greek government debt of €322bn9 would still appear to be unsustainably high in proportion to its economy (€184bn) at 175% of GDP10, particularly with the yield on the Greek 10 year government bond at 8% (although this yield is down significantly from its peak of 31% in 201111). However, this privately held tradable debt only accounts for 17% of Greek government debt, with the rest in the hands of the IMF, EU and Eurozone12 central banks charging only a nominal rate of interest. In fact, the true debt servicing cost to the Greek government is just 2.3%13 and the average duration 16 years14. This makes Greece’s debt burden much more sustainable (€7.5bn in interest per annum rather than €26bn at the implied 8% rate) than headline figures suggest. In addition, Greece now has a primary surplus (fiscal balance before interest payments) of 1% of GDP (€2bn) from a deficit of 11% in 200915 along with an ambitious €22bn privatisation programme16. This is a remarkable fiscal adjustment. It is also probable that the EU creditors reward Greece for its economic progress through further reductions in interest payments or extensions in maturities of loans. In other words the equitisation of Greece’s publicly held debt replaces the need for default or further haircuts on privately held debt. This should lead to the Greek government regaining access to capital markets and financial markets regaining confidence in the country.

Chart 2: Europe’s Periphery Returns to Growth17

The Eurozone periphery is slowly emerging from recession: economic activity in Ireland, Portugal and Spain is now expanding again18; recovery in Italy and Greece should follow. However, it is Greece’s emergence from recession that is the most symbolic. Greece has been the epicentre of concerns over the Euro. It is hard to avoid the conclusion that if Greece was ever going to leave the Euro then this event would have already occurred. That Greece has achieved the rebalancing of its economy through a slow painful internal devaluation - rather than a quick external currency devaluation - will be seen by all but the most ardent anti-Euro ideologues as a validation of the Euro as an (albeit imperfect) political and economic project19 . As such it should lead to greater confidence from financial markets and business leaders in the economic prospects of the continent as a whole.

Barry Norris
Founding Partner & Fund Manager
27th November 2013


1ELSTAT/IMF. The reduction in GDP has been 22% nominal and 26% real (IMF, Greece, 4th Report, July 2013, P65)
2 “The Greek Shoots of Recovery”, Alpha Bank, October 18th 2013, p8; Wages -30% 2008-2013 according to Alpha Bank/Eurostat, p4; -20% 2010-2014 according to the IMF Greece, 4th Report, July 2013 p10
3 “The Greek Shoots of Recovery”, Alpha Bank, October 18th 2013, p2, p4, Hellenic Statistical Authority
4 “Where is the Greek Economy Heading?”, presentation by Bank of Greece Governor George Provopoulos 14th November 2013
5 A 33% stake in OPAP (worth €712m) was sold to a consortium of foreign investors. BCP placed a €494m stake in Piraeus. York Capital bought €100m stake in Gekterna; Fairfax €45m in Mytilineos. Cosco agreed to invest €230m in Port of Piraeus development. Source: Bloomberg
6 ELSTAT/IMF. Because of the importance of tourism to the Greek economy Q4 2014 is likely to see a QoQ decrease in GDP and there is no seasonally adjusted QoQ figure, hence although expansion QoQ in Q2 and Q3 2013 no “official” end to recession as yet
7 This follows a -4.25% YOY contraction in 2013. Source: IMF, Greece, 4th Report, July 2013, P10
8 Quarterly change of Euro Real Effective Exchange Rate (REER) with respect to  Unit Labour Costs (ULC) against 36 competitor countries, for Greece and other Eurozone countries. Source: Alpha Bank November 2013
9 Hellenic Republic Debt Bulletin, Sept 2013 (17)
10 IMF, Greece, 4th Report, July 2013, P62
11IMF, Greece, 4th Report, July 2013, P41
 12 IMF, Greece, 4th Report, July 2013 P60. IMF €29bn, EAMS €190bn, Private Sector €103bn o/w €37bn is held by Eurozone central banks ( Morgan Stanley estimates)
13 IMF, Greece, 4th Report, July 2013 P51. Also JPMorgan Sept 23rd
14 Hellenic Republic Public Debt Bulletin (71), September 2013, p3
15 “The Greek Shoots of Recovery”, Alpha Bank, October 18th 2013, p2
16 IMF Greece, 4th Report, July 2013, p63
17 Source Eurostat/UBS
18 Bloomberg October/November 2013
19 For the record, we do not believe that Greece not leaving the Euro justifies the UK joining the Euro

This document has been provided for informational purposes only solely for Professional Clients as defined by the FCA and does not constitute investment advice. Information and opinions expressed in this material are subject to change without notice and to the best of Argonauts knowledge are correct at the date of producing the document. They have been obtained or derived from sources believed by Argonaut Capital Partners LLP to be reliable but Argonaut Capital Partners LLP make no representation as to their accuracy or completeness . The writer of this piece may have conflicts of interest as may have personal holdings in the companies mentioned.