WSJ: Trouble Brews for Greece Despite Good News on Bond Sale

10,/4/2014

Six-Year Recession Seems to Be Over, but Return to Sustained Economic Growth Far From Certain

Greece's successful return to the markets Thursday was a triumph of politics—and it is in politics where the risk to the country's recovery lies.

A good-news operation has been under way since the start of the year. Once the target of vocal criticism by euro-zone politicians and officials involved in the bailout process, Greece has been getting praise from all quarters.

European Union officials say that at the heart of this turnaround in mood is the alliance forged between Greek Prime Minister Antonis Samaras and German Chancellor Angela Merkel.

Ms. Merkel arrives in Athens on Friday—her second visit since Mr. Samaras took office in summer 2012. Greece's return to longer-term market borrowing just 24 hours before serves as the perfect red carpet for the German leader.

But behind the good news, not all is well with Greece's economic resurrection.

Euro-zone officials involved in running its €240 billion ($333 billion) bailout fret about the government's wavering determination to implement radical economic measures, as well as the country's crippling debt load, which peaked at 176% of its economic output last year.

In private, these officials say their political bosses have told them to contain their concerns about Greece's economy.

And concerns they have. European Commission and IMF officials privately say that, despite signs that the Greek economy has finally bottomed out after a six-year recession that has claimed a quarter of its output, the return to sustained growth is far from certain.

They're especially worried that a number of laws the Greek parliament has passed to overhaul its public administration, labor market and goods and services markets won't be properly implemented.

These include laying off more public-sector workers in the next few months, liberalizing the sale of nonprescription drugs and cutting employer contributions that finance auxiliary pension funds but drive up the cost of labor.

The absence of political pressure from EU leaders to forge ahead with these policies ties the technocrats' hands.

Technical discussions about Greece's progress have turned surreal, says one senior euro-zone official, as Germany, the country that was always toughest on Greece in past meetings, has "turned soft." Another wonders where the pressure on Greece might come from "when the Germans don't want to play bad cop."

Officials also know that tough talks on how to further ease Greece's debt burden lie ahead and that the country's bailout won't see it through 2015 and 2016. More loans could be needed.

Slack in legislative efforts is inextricably linked to the Greek government's political strength, officials say.

If Mr. Samaras sees his power fraying, he will be tempted to go easy on overhauls that will upset vested interests, their thinking goes.

"Samaras is looking to reinforce his narrative that Greece has turned the corner, that economic confidence has returned, and use this to aid him in the European [Parliament] and local elections in May, where it looks as though the governing parties will perform badly," says Mujtaba Rahman, Europe director of the consultancy Eurasia Group.

The premier's conservative New Democracy party has trailed the opposition, radical-left Syriza party slightly in most recent surveys.

But Syriza has failed to capitalize on people's economic misery to open up a broader lead. Syriza, whose roots are in anticapitalist protest, remains split between a majority that is trying to become pragmatic and a hard-line minority that would rather leave the euro than continue with austerity.

Mr. Samaras is presiding over a volatile political system that can produce surprises and trouble at any moment, atop a nation that is bitterly split over the country's course.

His coalition partner, the center-left Socialist party known as Pasok, has sunk to single-digit support in opinion polls after dominating Greek politics for 30 years. Voters are trying out new parties, including The River, a centrist group launched in March by a television anchorman with few specific policies so far.

The Greek authorities' crackdown on the neofascist Golden Dawn party, whose leaders have been indicted as members of a criminal organization, has dented but not broken its support.

Golden Dawn is trying to exploit the resignation last week of Mr. Samaras's cabinet secretary and close aide, Takis Baltakos. In an embarrassing moment for the premier, Mr. Baltakos was secretly filmed telling a Golden Dawn lawmaker that the party's prosecution is politically motivated, which the government denies.

The government's tiny majority in parliament has led many analysts to predict early elections, possibly this fall, if Mr. Samaras can gain some debt relief from Greece's European creditors. Other analysts believe the government will stagger on—if only because it isn't clear what could replace it, apart from chaos.

"This government is very vulnerable. It has a very thin majority, and Pasok is close to extinction," says Theodore Couloumbis, professor emeritus of politics at Athens University. "But its weakness is its strength, because there is no clear alternative, and average Greeks are aware of that."

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