Head of Macroeconomic Research
Summary: One-time bond-market pariah, Greece has recently joined the list of countries that are getting paid to borrow money in debt markets. A sale of almost half a billion euros of 13-week bills drew a yield of minus 0.02%. Contrary to what have been said here and there, this surprising turnaround is not the signal that the Greek crisis is over.
Actually, it essentially confirms that negative rates on European sovereign bonds are the new normal, partially explained by the ECB purchases on the secondary market and regulatory requirements that automatically increase the demand for sovereign bonds. We have definitively entered into japonisation of the bond market, and this situation is likely to last longer than most expected as QE infinity is taking place. The phenomenon of negative interest rate on Greek debt should not be exaggerated since it only concerns short-term debt. By comparison, Germany can borrow up to 30 years at negative rates and France up to 15 years.
In the case of Greece, it is mistaken to consider that negative rates are the reflection of the return of investor confidence. The Greek indicators are well on track, with strong economic growth expected to reach 1.8% this year, after 1.9% last year, and good resilience of the service and the manufacturing sectors, while other European countries are paying the price of the US-led trade war. Nevertheless, it would be misleading to believe the Greek crisis is over. There are numerous signs of weakness, such as the growing public debt that has increased from 178% of GDP in 2016 to 181% in 2019, social tensions related to high unemployment, a fragile industrial base that makes the economy too dependent on tourism revenues and, above all, a very weak banking sector. This is certainly the most worrying black spot. Until the banking sector recovers, access to credit is restricted which impedes investment. The level of non-performing loans is still very high, at 45% in the first quarter of 2019. This is a long-term issue that will take many more years to be solved by the Greek authorities
Finally, many doubts can be raised over the country’s ability to recover its pre-crisis level of wealth. Looking at GDP per capita, it was standing at 21,800 euros in 2007, the highest recorded level. Nowadays, it is about 24% below. In recent years, it has tended to stagnate. One can only be pessimistic about the outlook for the coming years given rising risks at the global scale that will inevitably affect the Greek economy.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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