On the way through
The Greek government's determination to press ahead with its convergence policies in the face of opposition from the trades unions, has helped the Athens equity market to be among the best performing world-wide over the past year.
The privatisation process and political reform packages have been unpopular with many groups, from state bank employees to teachers, but the government's fiscal and monetary policies have kept Greece on track for EMU during 2001. This has resulted in the Athens General Index soaring 81% since last March.
Mariella Parfyratos, Head of equity analysis at NBG International in London, sees no reason to believe that this positive economic cycle will not continue. In the past we have seen short-lived cycles, but this one is driven by the urgency of the convergence programme. All the indicators suggest that this upward movement will continue beyond a year." Not only has the government followed the Maastricht guidelines to the letter, but it has also pushed through commercial reorganisation on the back of those policies. The predicted banking mergers and acquisitions (See IPE July/August 1998 ) have taken place, and the re-tendering for the troubled sale of Ionian Bank has now been given the go-ahead. This, together with a further tranche of telecom stock to come to the market, and the sell off of Hellenic Petroleum, is sure to provide a further equity surge. "These are major stocks and will obviously exert more upward pressure, as will the arrival of more mobile phone stock during the coming months," says Parfyratos. "The other sector in which we expect to see some reorganisation is the construction industry, whose margins have been squeezed of late," she adds.
The strength of the equity market, and the underlying reasons for it, have also calmed the fixed interest market, which is witnessing a fall of rates in line with inflation, but also convergence with German yields.
"There is no question but that the current fiscal and monetary policies have paved the way for the equity boom, but they have also resulted in huge primary surpluses, which have helped to bring down not only the budget deficit, but also levels of overall debt," asserts Mark Rall, emerging markets analyst with HypoVereinsbank in Munich. With the deficit down to 1.9% of GDP from 2.4%, and overall debt reduced to 105% of GDP, the economy is on track for EMU. This despite the fact that the government's anticipated growth figures may be optimistic, given the overall drop in growth across Euroland. Rall feels that the steepness of the decline in yields confirms the success of the government's policies. "Yields show a convergence with German yields over the past six months. The 10-year bond benchmark spreads have declined from 350 basis points to 240. We would expect this to drop to 150 basis points during 1999 in line with the Maastricht requirements, " he says.
Three month deposit rates are back to the levels of last summer, after the Russian default crisis saw them soar to 17%. The downward trend of rates is likely to continue in line with inflation. "We predict a cut of 200 basis points this year, and have already seen 25 of those in the first months of 1999. The inflation targets for EMU are quite difficult, and Greece may have to get down to 2.5%, but that should be achievable if the government is not blown off course," says Rall.
With the drachma also back to its pre-crisis value against the euro, having appreciated after devaluation, there seems little to divert the government from its stated path. Furthermore, with elections not due until the end of 2000, it may be encouraged to even accelerate its convergence plans in order to benefit from the electorate "Europhoria" seen elsewhere in Europe. Kevin Hall"