Saint Paul, Minnesota – December 24, 2014 – Greece is once again making news headlines. Six years after the worst of the Global financial crisis, which saw the Greek stock market plummet 70%, volatility has risen and stocks are again falling. Through December 19 the Greek market is down over 25% for 2014. The Prime Minister has called for a Parliamentary vote in an attempt to elect a new coalition and regain political control. The first vote (December 17) failed. The Prime Minister has two more opportunities to assemble a majority and is working to assemble that majority at this writing. If neither vote succeeds, it will force a general election, which at this point appears to favor the populist coalition, SYRIZA. These developments have significant meaning for investors in Greece. Some observers have even started to speculate on the future of Greece as a member of the European Union and euro currency bloc.
Following the global financial crisis in 2008, the EU imposed strict austerity measures on those countries deemed to be in violation of EU economic policies. Greece was considered among the most flagrant violators of the requirements and began to implement a series of changes designed to bring them in line with EU requirements. Chief among these changes were laws enacted to increase banking transparency and regulation; tax code reform; improved corporate governance; and adoption of more responsible fiscal policy. These are all important components of the Magni Sustainable Wealth Creation principles. The passage of these reforms and their implementation were historic and began to set the Greek economy on sounder, long‐term footing. Simultaneous with these reforms, Magni began to upgrade Greece in our proprietary ranking system. Greece rose significantly from one of the lowest rated of all the developed markets to the middle of pack.
These reforms were not without cost, however. Greek GDP contracted by 10%, personal income tax rates were increased 25% and official unemployment jumped to 28%. Finally, after five years of structural reform, austerity and contraction, the Greek economy began to grow again in first quarter of 2014.
Unsurprisingly, the Greek population is showing signs of rebelling against the period of stagnation. The return to growth has many Greeks pushing for a relaxation of austerity and a loosening of the reforms that have helped return their economy to growth. The possibility of backtracking on reforms is one reason the Greek stock market is in retreat and is a development that Magni is watching closely.
The Magni research process is predicated upon measuring the country‐level adherence to economic principles, policies and infrastructure necessary to achieve sustainable growth and promote shareholder value. Magni ranks the associated factors and rewards countries that improve their ability to support sustainable growth and shareholder value. Greece’s ranking began to improve in 2012 after implementation of the EU imposed economic reforms. Subsequently, the Greek stock market began to reflect the improved economic structure.
Although there has been populist pressure to backtrack on reforms, nothing concrete has been enacted or announced. If any evidence of retreat emerges, the Magni ranking will be adjusted to reflect those changes. A quick review of our research indicates that were Greece to leave the EU and/or backtrack on reforms, their Magni Country Score would likely plummet and could drop them to near the bottom of the emerging market universe (Greece was reclassified as ‘emerging’ from ‘developed’ by MSCI in November 2013). The institutions and policies required to remain in the EU are crucial to Greece’s ranking in the Magni process and, we believe, to their future prospects for prosperity and growth.
As for abandoning the euro, we believe there is a low probability of that occurring. After decades of high inflation and devaluation of the Drachma, Greeks have strongly embraced the stability of the euro. Even the populist SYRIZA party has expressed its commitment to retaining the euro. And without abandoning the currency, it is difficult to conceive of the Greek economy withdrawing from the EU. Magni believes this worst‐case scenario for Greece is highly unlikely. However, modest retreat from reform is a real risk to the gains achieved and one that we will be monitoring closely.
Up to now, the talk of backtracking on Greek reforms is just that, talk. Reform‐fatigue in Greece has given voice to a more populist message as articulated by the SYRIZA political party. While we at Magni cannot discount the possibility that a more populist regime might come to power, we have not yet seen anything in the way of concrete steps to reverse or dismantle any of the reforms. And we do not foresee an environment in which Greece abandons the euro in favor of a return to the Drachma. We will be watching this situation closely and taking appropriate ratings action if actual changes do occur. If the reforms continue we believe that the changes enacted thus far, as well as plans for future reforms, put Greece on a path of more sustainable growth. In this case, the recent weakness in Greek stocks could turn into an attractive buying opportunity.