The eurozone crisis has turned a corner with Greece’s recent reentry into international capital markets. Coming only two years after the country nearly collapsed and threatened European Union cohesion, the event has created reverberations amongst analysts and investors globally.
Investors had avoided Greek bonds, worried about the country’s financial uncertainty for years, but this month, many had switched their tone and new Greek debt was in high demand. Why this drastic change in investors’ attitudes? Record low interest rates globally. With interest rates at their lowest level in years, investors are being aggressive in searching for returns, even if they come with increased risk. Greece sold $4.2 billion of bonds on April 10 but demand was five times oversubscribed.
It seems obvious that investors are playing a risky game but they are reassured by their faith that European financial support will support these investments if the situation takes a turn for the worse—European Central Bank President Mario Draghi has previously stated he will do “whatever it takes” to prevent a crisis relapse.
That being said, Greece’s economic situation is still weak to say the least. Unemployment sits around 27 percent and growth has remained sluggish. Even more worrisome, Greece is still dealing with an extraordinarily high debt-to-GDP ratio that has been deemed unaffordable in the long-run by several economists. Stephen Nelson, an assistant professor of political science in Weinberg focusing on international political economy, recently commented: “In my view it is impossible to know, given the very low yields for “safe” sovereign issuers [and] the general state of sovereign debt markets…whether the appetite for Greek debt tells us anything about the state of Greece’s economy. I think that the Greek economy is in total disarray; yes, the [government] has been able to cut to the bone and to get to a tiny current account surplus, but the debt overhang is massive and the deep structural problems have not been resolved.”
As Nelson describes, the current situation facing Greece is obviously not optimal: “Basically Greece is addicted to debt because it has so much of it. It would be better to not have to borrow than to have to borrow, but it has bills to pay and the official lenders (the ECB, EU, and IMF) are exhausted and cannot continue to fund the country.”
Within Greece, politicians deemed this development a victory as the high demand for the country’s debt has been spun as “a sign of trust in the Greek economy” by Antonis Samaras, the Prime Minister of Greece. But Athens must continue along the path of rigorous budget reforms and avoid complacency to prevent a future crisis. Absent that, fears of several experts will be realized as Greece’s economy falls back into calamity given the underestimated risk investors have taken on with the country’s new bonds. Therefore, this recent economic development must be closely tracked in future months to gauge whether or not Greece’s “turning point” was merely rhetorical or successfully actualized on the path toward recovery.
