Ode on a Grecian Bond

Greece’s impressive recent bond sale shines a bright light on the country’s future, but it hardly resolves its financial crisis.

As comebacks go, it was pretty staggering: A little over two years after it defaulted in the world's largest debt restructuring deal (which caused private sector bond holders to lose 75 percent of their investment), Greece finally returned to international markets on April 10. And it did so in style, by issuing a five-year, 3 billion euro bond with a yield of 4.95 percent that was oversubscribed seven times. For some in Greece and those watching from afar, last week offered the first tangible sign that Greece's era of crisis and fiscal austerity is coming to an end. But the euphoria of this landmark event will have been lost on many Greeks whose lives have been mangled beyond recognition over the last few years. For them there is no sense that equilibrium is being restored.

It could be argued that there was a distinct symmetry to Greece's recent return to international markets. The bond placement came almost four years to the day since the country last sold its debt and the looming crisis meant it struggled to attract capital despite an unsustainably high 6 percent interest rate. After that, investors decided a foundering Greek economy without a eurozone backstop was too much of a risk and yields soared. Being cast into the wilderness forced Greece to sign an unprecedented bailout agreement with the European Union and International Monetary Fund (IMF) in May 2010 that imposed demanding fiscal and reform targets.

Prime Minister Antonis Samaras, the conservative leader who heads the two-party coalition government, referred to the placement of the heavily oversubscribed bond as a "decisive step to exit the crisis." For Greece, it has all been about taking small steps out of the gloom after seeing almost a quarter of its economic output disappear since the recession began in the second half of 2008. Tapping the markets is just one part of the recovery process; the country's next achievements are already visible on the horizon. The first signs of growth are expected later this year, supported by what is likely to be another record tourism season. After the summer the eurozone is due to launch discussions with Greece about easing its debt pile, which is currently around 175 percent of GDP.

The country's prospects certainly seem brighter than even two years ago, when speculation about whether Greece would leave the euro added to political and social instability that threatened to drive it completely off the rails. A primary budget surplus was delivered in 2013 -- a year ahead of schedule -- in one of the world's most dramatic and hard-hitting fiscal adjustments that came mostly on the back of spending and wage cuts rather than higher tax revenues. Greece even produced a current account surplus -- though the amount was slight, it was the first surplus since records started to be kept in 1948. In December, the Purchasing Managers Index (PMI) measuring manufacturing activity showed output rising for the first time in more than four years.

These are some of the factors that created the positive mood the center-right New Democracy and center-left Pasok administration decided to cash in on this week. Plans for a return to the bond market were first drawn up last year as Greece put the threat of a euro exit behind it, lined up economic growth in its sights, and saw its bond yields begin to drop significantly. "We are already surprising (lenders). I want us to go even further than that," Samaras said in May 2013 as he told business leaders a bond placement was in the cards for the first half of this year. Two other euro-area countries that had been bailed out -- Portugal and Ireland -- also returned to the markets in 2013, helping break the ice before Greece's re-entry.

The Samaras administration argued that by issuing the bond and creating greater confidence it would also reduce the cost of its short-term borrowing. There was, though, a symbolic element to the process. Having secured the last major installment of its 240 billion euro E.U.-IMF bailouts, the Greek government wanted to make it clear it would not need a third loan package. So in other words, a return to bond markets was, in this sense for Greece, a gesture of fiscal sovereignty.

To be sure, it was an expensive gesture. Greece will have to pay more than 700 million euros in interest over the next five years for the April 10 bonds. It seems rash for Greece, which wound up in an economic mess because it took on debt it had no hope of paying back, to now borrow from the markets simply to show that it can. Even Finance Minister Yannis Stournaras had insisted, until a few days ago, that Greece did not need to borrow to cover its expenditure needs. He has yet to explain how the 3 billion euros raised on Thursday will be used. Given international investors' appetite for high yields and the fact that interest rates on Greek T-bills had been falling anyway, it is possible that issuing a five-year bond now will not lead to a marked reduction in short-term borrowing costs. Opposition parties accused the government of returning to markets now to boost its chances in May's local and European Parliament elections and to overshadow the recent resignation of cabinet secretary and close Samaras aide Panayiotis Baltakos after he was secretly filmed talking to Golden Dawn about a judicial probe into the neo-Nazi party's alleged criminal activities.

The timing and logic of Greece's return to the markets deserves more scrutiny, but the most detrimental effect of last week's bond sale could be that it may obscure serious underlying structural problems.

There are concerns about whether Greece's towering debt is sustainable and these will persist until there is a firm decision from the eurozone on debt reduction. It is not clear, though, when this decision will come and how substantial the relief will be. Even the optimistic forecasts for growth rates of around 4 percent of GDP over the next few years do not guarantee that Greece will be able to pay off its debt. Greece last experienced these growth rates during its first hope-filled years of euro membership a decade ago. This level of growth is also unlikely to be enough to have a palpable impact on the staggering unemployment rate, which eased slightly to 26.7 percent in January. The Labor Institute of Greece's largest union, GSEE, estimates that at an annual growth rate of 3 to 4 percent of GDP it will take more than 20 years to create the roughly 1 million jobs lost since the crisis began. This will leave an awfully high proportion of Greeks dangling helplessly in economic purgatory for an unacceptably long time. Even now, less than 15 percent of some 1.3 million unemployed are eligible for benefits.

Six years of recession and Greece's panic-stricken efforts since 2010 to meet the targets set by its lenders have to some extent dehumanized the crisis. It means that many people no longer flinch at the fact that a developed European economy has about 160 percent more people out of work than it did four years ago or that 3.5 million employed Greeks have to support more than 4.7 million who are unemployed or inactive. It also leads to dire social consequences being overlooked. For example, while Greece is being praised for its economic turnaround and a successful return to the markets, more than a third of its population is considered to be at risk of poverty or social exclusion -- the fourth highest figure in the E.U.

The challenge for Greece now is to provide its unemployed, socially excluded, and even average households, which have seen disposable income plummet by about 30 percent, with new and better opportunities. For these people, Greece's return to the markets is an afterthought. Their main interest is in jobs and respectable salaries, which are in high demand but short supply. Banks are still reluctant to lend to businesses after four years of credit contraction, exports are stagnant despite a substantial internal devaluation, and investment in the real economy remains scarce.

Greek society will continue to be sorely tested for many years to come if there is a failure to restore the flow of liquidity to healthy businesses, get banks to lend to new entrepreneurs, and attract major investment that could create jobs on a large scale. The pressure, therefore, is on Greece's decision-makers to come up with solutions that will improve people's daily lives. Here too, though, there are complications. The government has seen its 29-seat majority in parliament reduced to just two since 2012. Last month, junior coalition partner Pasok by-passed a procedure that would have caused the ousting of two MPs who failed to support a package of reforms because this would have likely triggered the government's collapse. The main opposition, radical leftist Syriza, has yet to provide a coherent alternative to the coalition's austerity program. It looks set to win May's elections but not by a convincing margin. Greece is not experiencing the political instability of previous years but it is certainly suffering from inertia.

What happened on April 10 is the result of a number of significant fiscal and economic achievements but this should not disguise fundamental weaknesses. These problems run much deeper and cannot be remedied just by raising capital from the markets. Until there is substantial job creation in the real economy and a serious move to alleviate social problems that are unprecedented for a eurozone member, we cannot speak of Greece having come full circle or of Greeks getting closure on the crisis.



No Charity

Germany's crackdown on a Hezbollah-affiliated group shows that it may finally be wising up about the Lebanese paramilitary organization.

On April 8, German police officers raided the offices of the innocuously named Lebanon Orphan Children Project (Waisenkinderprojekt Libanon e.V.) across six states in the Federal Republic. They seized cash and files from its properties, and froze two bank accounts totaling $143,000. But this group wasn't a humanitarian organization -- the German government had come to accept that it was a Hezbollah front, and shut it down effective immediately.

The Lebanon Orphan Children Project was created in 1997, and funneled donations to the al-Shahid ("The Martyr") Association in Lebanon. Al-Shahid was "disguised as a humanitarian organization" and "promotes violence and terrorism in the Middle East using donations collected in Germany and elsewhere," according to a 2009 report by German security expert Alexander Ritzmann.

The al-Shahid Association, Ritzmann wrote, provides financial support to the families of fallen Hezbollah members. In other words, German donations were being used to support the families of suicide bombers who targeted Israelis, to support Hezbollah combatants in Syria, and to generate more recruits.

Five years later, Germany's Interior Ministry accepted Ritzmann's reasoning. "The name of this organization masks it real purpose," Emily Haber, state secretary at the Interior Ministry, said on Tuesday. "The group is not a humanitarian organization."

Germany has lagged behind much of Europe in designating Hezbollah as a terrorist organization -- but it may be catching up. While the Netherlands outlawed the Lebanese paramilitary organization in 2004 and Britain designated the group's military wing as a terrorist organization in 2008, Berlin has been recalcitrant in clamping down on the Lebanese group. Until this week, Germany's main challenge to Hezbollah came when the state government in Lower Saxony -- where the Orphan Children Project website is registered -- revoked the tax subsidy it received as a non-profit organization in 2010.

With Berlin treating Hezbollah with kid gloves, the group's members flocked to Germany. Last year, a spokesman for Lower Saxony's intelligence agency told me that there were 130 active Hezbollah members in the state. Germany's federal domestic agency said there are 950 members spread across the Federal Republic, including 250 in Berlin.

Germany's unofficial policy of soft-pedaling Hezbollah's terrorism stretches back as far as the early 1990s. In 1992, a joint Iran-Hezbollah operation assassinated three members and one supporter of the Democratic Party of Iranian Kurdistan, a political dissident organization opposed to the Iranian regime, in the West Berlin restaurant Mykonos. According to the German indictment in the case, two Hezbollah operatives and two Iranian intelligence officers carried out the plot.

Following the Mykonos attack, Germany's principal aim was to prevent further acts of terrorism on its soil. German security experts have long suggested that an unspoken agreement was reached between then Chancellor Helmut Kohl's administration and the Lebanese paramilitary organization: Germany would accept Hezbollah's activities -- including fundraising -- on its soil, in exchange for Hezbollah's promise to not carry out attacks.

The unwritten quid pro quo largely endured -- until this week. While Germany has not banned Hezbollah entirely, it issued an opening salvo in the crackdown on the organization. And this crackdown appears to be gaining steam across the continent.

The European Union put Hezbollah's military wing on its terrorism list last July because the Lebanese militia carried out a bombing attack on an Israeli tour bus in Burgas, Bulgaria, which killed five Israelis and their Bulgarian bus driver.

Israel submitted a thick legal dossier to Germany, which listed Hezbollah's terrorism and criminal activities in Germany, prior to the EU ban. According to German commentators, the dossier played a critical role in persuading German policymakers to support the EU ban on Hezbollah's armed wing.

The Orphan Project meets the criteria of the 2013 EU terror listing. All of this helps to explain why the Interior Ministry used the opportunity, as it said, to establish a "watertight case" against Hezbollah and so insulate the German government against legal challenge on the issue.

However, few of the 600-plus deputies in the Bundestag, Germany's parliament, have demonstrated a desire to completely evict Hezbollah from German territory. The most prominent advocate of a full ban is Deputy Philipp Missfelder, a foreign-policy spokesman for Chancellor Angela Merkel's Christian Democratic Union (CDU) party. He has some support among his center-right colleagues: Thomas Feist, a CDU deputy from Leipzig, wrote last year, "We should no longer allow Hezbollah to take advantage of an [non-profit] association-friendly legal climate in Germany and Europe to collect money to conduct terrorist activities -- also in Europe."

Germany's center-left parties, however, have tended to show sympathy for Hezbollah. In 2004, the Friedrich Ebert Foundation -- the in-house think tank of the Social Democrats, which currently serve in Merkel's coalition -- organized and funded a conference with Hezbollah in Beirut. The conference was titled, "The Islamic World and Europe: From Dialogue Towards Understanding," and featured speakers from Hezbollah and Hamas.

The Social Democrats aren't merely an outlier among the German left. Jürgen Trittin, the former head of the opposition Green Party who also currently serves as a deputy for the party in the Bundestag, sought enhanced political relations with Hezbollah after the 2006 Israel-Hezbollah war. He did so, he said, because Hezbollah played a "very positive" role in Lebanese politics. Meanwhile, a deputy and foreign-policy spokesman for the Left Party, which is currently the most powerful opposition party in the Bundestag, marched in a 2006 pro-Hezbollah rally in Berlin to chants of: "We are all Hezbollah."

Merkel's conservative party has bucked this leftist trend, attempting to align Germany closer to Europe's growing anti-Hezbollah consensus. Interior Minister Thomas de Maiziere, a member of Merkel's party, even cited the "special relationship" between Germany and Israel as a justification for the ban on the Hezbollah-affiliated fundraising charity. As he put it: "Organizations which directly or indirectly work against Israel's right to exist from German soil cannot rely on the guaranteed right to freely organize."