Is Greece really back?
By Mohamed A. El-Erian
It has been two years since Greece narrowly avoided an exit from the euro area that could have been disastrous for the country and extremely challenging for Europe and the global economy. Although the country has made a lot of progress since then, markets are far too sanguine about its rehabilitation.
On June 17, 2012 -- exactly two years today -- when Greeks went to the polls in parliamentary elections seen as a referendum on the government's austerity measures, investors were right to be worried about the country's economic future. An exit from the single currency, with all the financial chaos that could entail, was a clear and present danger.
Now, the seemingly tentative coalition that emerged from those elections has steered Greece to relative safety. But the attendant sharp drop in the government's borrowing costs, and investors' hearty appetite for new issues of Greek sovereign and bank bonds, overstate the domestic improvements.
The rally in Greek assets has been turbocharged by a global quest for yield amid western central banks' extraordinary efforts to keep interest rates low. To hold on to foreign capital and reduce the chances of further instability, Greece must do more to improve its economic health.
The government of Prime Minister Antonis Samaras has achieved a lot over the past two years. It has narrowed the budget deficit, improved tax administration, reduced spending inefficiencies, and increased the transparency and accountability of government operations. The country has also reduced its trade deficit and the risks associated with what was a heavily overextended and undercapitalized domestic banking system.
That said, not all is well. After enduring a sharp collapse in economic activity...