Market Extra: Greece gets green light to exit bailout program, but worries linger

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Call it a happier sort of “Grexit.” Greece’s eurozone partners on Friday cleared the way for the country to depart its third bailout program in August, ending an eight-year stretch of financial assistance.

Finance ministers agreed a deal to provide some debt relief , which should boost the country’s cash buffer as it attempts to build on a long overdue return to economic growth.

Greece’s economy is picking up steam, leaving the country on a new path that means “no return” to the dark days of the crisis, said Alexis Charitsis, Greece’s alternate minister for economy and development at the 7th Greek Investment Forum on Tuesday.

But don’t overdo it. Greece should continue to grow, but upside appears limited due to unfortunate timing, with the recovery gaining traction just as a tailwind from global and, more important, eurozone growth appears to be fading, said Ebrahim Rahbari, head of global macroeconomics at Citigroup, in an interview on the sidelines of the forum. And now, instead of Greece’s woes spreading fear, or “contagion,” to its fiscally strapped eurozone neighbors, there’s the danger that any sustained turmoil in Italy could undercut Greece.

“It’s unfortunate that Greece is recovering late in many cycles,” he said.

All that said, the numbers are moving in the right direction. The collapse of government finances in 2009 led to default, bailouts and a crushing, yearslong depression that shrank output by 25%. Gross domestic product grew 2.3% year-over-year in the first quarter and expanded by 1.4% in calendar year 2017, boosted by a rise in investment. Greece has returned to the capital markets, issuing debt twice in the past year via a five-year bond last July and a seven-year bond in February at yields of around 4%, contributing to a healthy cash buffer, according to Capital Economics.

Greece’s benchmark stock index, the Athex Composite Share Price Index GD, +2.01% has lagged behind its European peers, posting a 4.6% year-to-date decline versus a 1.3% fall for the pan-European Stoxx 600 SXXP, +0.46% In the U.S., the S&P 500 SPX, -0.63%  is up 3.7% year-to-date.

But Athens is also likely to be left disappointed by the terms of the debt relief likely to be agreed on Thursday, analysts said. And there are plenty of nagging worries about Greece’s debt load and longer term economic prospects.

The Eurogroup, which is made up of eurozone finance ministers, is expected to agree to a three-part package of debt relief when they meet Thursday. The first part will effectively allow the return of interest payments Greece is making on Greek bonds held by the European Central Bank, worth around €4.5 billion ($5.2 billion) over the next three to five years, according to Mujtaba Rahman, managing director for Europe at Eurasia Group. That’s tied to Athens implementing reforms it’s already agreed to, including pension cuts in 2019, and not rolling back previously agreed measures it’s already enacted.

The second set includes additional payment holidays and deferrals on loans from the European Financial Stability Facility, while the third set is likely to consist of maturity extensions on the loans, Rahman said. In addition, it’s possible that a portion of unused funds for Greece in the European Stability Mechanism will be sent to Athens to add to its cash buffer, he said.

Due to expected opposition from Germany, however, Greece is unlikely to see ministers agree to a plan that would tie future debt relief to economic growth. A French-backed proposal would see additional debt relief kick in if economic growth fell below 3.25%, but is likely to see the most opposition from Germany and other northern European countries who are insisting that debt-relief decisions should be discretionary, with the Eurogroup making a yearly decision, Rahman said.

With economists doubting the sustainability of Greece’s debt load, which stands at around 180% of gross domestic product, further pain may be in store down the road.

Expectations Greek debt will fall are “reliant on the government’s assumption that real GDP will grow at a sustained pace of over 2% in the medium term, which seems highly unlikely given poor demographics, troubled banks, economic rigidities and the continued austerity” required by creditors, said Jennifer McKeown, chief European economist at Capital Economics, in a Wednesday note.

But for now, the worst fears for Greece are receding.

Rahbari was the co-author of a Citigroup report in 2012 that coined the term “Grexit,” just before the Greek government defaulted and executed the largest sovereign debt restructuring in history.

Political risks surrounding Greece have receded significantly, even with elections due no later than next year, Rahbari said. Some analysts have argued that a victory for the opposition New Democracy party would likely be interpreted as business friendly.

Grexit is “off the table,” he said. “I wouldn’t go so far as to say it’s off the table indefinitely — many things can happen — but it really isn’t part of any serious discussion, that’s one of the positives… We don’t have to watch Greek politics that closely right now.”