Greece UPGRADED - is the worst finally for the troubled country?

Greece UPGRADED - is the worst finally for the troubled country?

Fitch has just raised Greece's credit rating to B- from CCC, with a stable outlook.

This is just the latest sign that after three years of crippling austerity, mass unemployment, violent protests and the rise of extreme right wing political parties, this spring could finally hold some hope for beleaguered Greece - which has endured the equivalent of economic Armageddon since the eurozone sovereign debt crisis exploded in 2010.

Falling bond yields, declining debt levels and the prospect of growth in 2014 has shifted the tone of the debate around Greece from one of unending doom and gloom to tentative hope that the green shoots of recovery are finally starting to break through.

Will Spring 2013 really herald fresh hope for Athens?

On the positive side the decline in bond yields has been impressive. Over the last 12 months the amount that Greece pays to borrow for 10-years has fallen by more than two thirds and is now a ‘mere’ 9.5%. That still a huge amount, but 12 months ago it was more than 30%.

This is the lowest level since the start of the crisis. In fact Greek bonds have been some of the best performers in the global debt market in recent months. Although one can argue that yields are still more than double pre-crisis levels, most countries in Europe’s periphery are unlikely to see yields return to prior norms any time soon.

But do bond yields really matter for Greece, after all this crisis was caused by Athens borrowing too much money? This is a good point, but falling bond yields are also symbolic of rising confidence. This could help boost investment into Athens at a time when it is desperate to turn its economy around in the long-term.

Stull hurting

However, in the short term the outlook is still gloomy. The economy contracted for an 18th consecutive quarter in at the end of 2012, although for those with a glass-half-full mentality, the contraction at the end of last year was the smallest it has been since mid-2010.

Other indicators including industrial production and even retail sales also suggest that the economy could be stabilising. The government now expects the economy to grow next year.

But Greece is still reliant on bailout loans and to continue to get these loans Greece has to meet tough targets set by the Troika – the ECB, EU and IMF. The last three years have seen Greece miss those targets again and again but 2013 could be the year when Greece moves to the top of the class.

It is expected to have a primary surplus this year, which means that once you strip out interest payments on debt the government will spend less than it brings in, and the long-awaited privatisation plan for state assets has also accelerated recently, including the successful sale of Greece’s most profitable company last month.

Towing the line on these targets makes it easier for Greece to get the bailout loans it needs to survive. In the past the Troika has threatened to withhold funds when Greece has missed targets, threatening the country with default and potential expulsion from the currency bloc. This stress and uncertainty made the economic problems even worse, so eradicating this uncertainty could help to calm the situation after a catastrophic few years.

The other benefit of meeting these targets is that it reduces the need for fresh rounds of austerity. The Greek people have dealt with an unprecedented level of austerity in the last few years, so while the belt won’t be loosened any time soon, there is a chance that it won’t be tightened another notch either.

Sometimes after a big fall you break rather than bounce

But let’s not kid ourselves, the Greece of yester-year: Of strong growth rates, rapidly rising incomes and long retirements is not coming back. The green shoots that we have mentioned are good for investors (especially in Greece’s bond markets) but may not be felt by the average person for some time.

Unemployment is at 27% - close to a record high – and almost two young people in three (64.2%) are without a job. The Greek government does not expect unemployment to fall in a meaningful way until 2015, as job growth tends to lag the overall economic recovery.

The good news for Greece is that recent signs point to stabilisation, which is soothing after three tumultuous years, but the bad news is that “recovery Greece” will be a very different place from what it was like before 2010.

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Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.