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Monday, May 07, 2012

The beginning of the end game in Greece?

At some point you have to wonder if Greece just enjoys the limelight…

This weekend’s election was expected to be relatively predictable with the largest parties forming a coalition and eventually adhering to the latest EU/IMF bailout package. Most eyes were on the French Presidential election and its impact on the Franco-German axis. Unfortunately, as we predicted, there were still a few surprises in store in Greece. Here’s the (almost) final result:
New Democracy – (18.86%) 108 seats
SYRIZA – (16.77%) 52 seats
Pasok – (13.18%) 41 seats
Independent Greeks – (10.6%) 33 seats
KKE (Communist party) – (8.48%) 26 seats
Golden Dawn (far-right) – (6.97%) 21 seats
Democratic Left – (6.1%) 19 seats
The biggest surprise is clearly the huge rise in SYRIZA’s share of the vote and the drastic fall in Pasok’s share.

In our post in the run up to the elections we laid out three scenarios: a stable ND-Pasok coalition, an unstable coalition leading to new elections where ND win a majority and an unstable coalition which falls leading to a cycle of elections where no-one can win a clear mandate. Those three scenarios clearly still hold, but the probabilities have definitely changed. Previously, the likelihood ran in order, however, now the second and third scenarios are looking increasingly probable.

ND and Pasok only hold 149 seats, short of the 151 majority they need. The Democratic Left has ruled out joining a three-way coalition. This makes new elections (probably in June) essentially inevitable as there is no stable coalition to be formed.

However, given the showing in the elections it is hard to imagine ND, or any party, gaining a clear majority. Given the strength of the anti-austerity feeling in Greece it is unlikely that these results would be a one-off. The anti-austerity parties only look likely to gain ground in subsequent elections, making a stable coalition less likely. This analysis suggests that a cycle of elections looks increasingly probable in Greece.

What does all this mean for the eurozone?

More uncertainty, that’s for sure. Germany and the EU have already both come out to reiterate the need for Greece to maintain its commitment to the latest bailout packages, stress that keeping Greece in the euro requires strong participation from both sides (rather ominous if you ask us).

Unfortunately, this looks unlikely, even if by some miracle ND and Pasok manage to form a workable coalition at some point. ND leader Antonis Samaras has already come out saying that he will “modify the memorandum [of understanding]” with Greece’s creditors to focus on growth. This can probably be seen as the start of his next election campaign but will still send shivers down the spines of German politicians.

A renegotiation of some form looks on the cards and will not be well received. Samaras would still be the EU’s preference given his history of strong rhetoric but then still signing up to the bailout programme. The alternatives are not appealing from eurozone leaders’ perspective: either there is a cycle of elections leaving no government in place to implement the reforms or the anti-austerity feeling grows so strong that a SYRIZA led government of some form comes to power, signalling the end of the bailout programme for good.

There is a confluence of factors here which increases the prospect of a Greek exit from the eurozone. The broader feeling in Greece although still in favour of the euro is shifting strongly against austerity – how this tension will play out is unclear but the usual fall-back of broad public support for the eurozone looks shakier than it has ever been.

Since the last round of poisonous bailout negotiations the eurozone and financial markets have been preparing for a Greek exit, if not publicly than definitely behind the scenes. The stance against any renegotiation and flexibility on reforms has hardened from eurozone leaders. Furthermore, Greece is approaching a primary surplus, the point where an exit and a full default look slightly more attractive as the country could (at least in theory) survive without access to financial markets or direct support.

Greece’s future will not be decided in the next few days but the coming weeks and months could well settle its place in the eurozone once and for all. This election may not provide many answers, as we expected, but it could mark the beginning of the end game in Greece.


Rik said...

It is difficult to see how this sorry excuse for a government (basically most positive realistic scenario) can meet the conditions of the troika and especially the IMF.
If the IMF wants to keep any credibility at that point they will have to take the plug out from their side.
Subsequently a Greece 3.0 will be necessary to plug the hole (and you don't see that happening).

Imho that is most likely the killerblow. Meaning the funds for the Greek bankrescue were a total waist of scarce resources. And it is now happening at a worse time and under worse conditions than 2.0, with the Spanish bail out not to far away and expected by everyone.

Re government. It could also be minority government with vague support from smaller parties. Or a caretaker/specialist one like now.
However at the end of the day we are just this far from another term reporting. And it is hard to see that the safeguards built in will hold and Greece will keep it's end of the bargain.
And another misinvestment of several 10 Bns that can be written of as the time it bought was absolutely useless.

Anonymous said...

I think the most important factor here is going to be the timing of the actual cash flows of the bailout. The bond swap is a fact now, but how about the billions that were going to support the Greek banks, for example - has that actually been paid to those banks yet? Does Greece have any bills falling due that the bailout money is needed for immediately? If so, has that bailout cash actually been paid?

Rik said...

Greece's government runs a deficit. Furthermore there are basically only disappointments cash flow wise: less revenue (be it tax or privatisations) and higher expenditure. They have some buffer but that is nowhere near enough.
Furthermore the planning was made in a much to positive/optimistic way. Just try to meet the 120, later even more percent. They will never make that anyway.

The problem with the IMF they will be having is that the IMF will only pay out a next term if the next 12 months cash flow wise is covered.
So not only direct cash flow problems but also foreseeable ones could do the job.

With a dysfunctional, inactive government and an economic recession it is almost guaranteed that the cash flow prognosis will not meet requirements.

Anonymous said...

A key coming event is the May 15th maturity of €430 million of Greek sovereign debt in international-law bonds whose holders have not agreed to the terms of the earlier PSI (Private Sector Involvement - ie debt write-down) and thus will demand full payment of these monies that Greece does not currently have.

Anonymous said...

The people of Greece do not want to remain a suzerainty of Germany.

Who can blame them?

Anonymous said...

All great news indeed!
Geniuses from European Commission may become directly responsible for bringing to power a coalition government that consists of totalitarian parties (I hope the socialists will invite Golden Dawn to join in; after all they are collectivists as well and the more the merrier).

Greece should be the first to break out of this "Herman Show", followed by Spain and Portugal and hopefully Ireland and Italy too!

christina Speight said...

Anyone looking at the results list may have not noticed the oddity in:-
New Democracy – (18.86%) 108 seats
SYRIZA – (16.77%) 52 seats

IF SYRIZA could pick up another 2% of votes and overtake New Democracy they'd have a bonus of 50 seats given to the largest party in the polls and New Democracy would lose the 50. . This oddity of electoral law has received little comment!

But in any re-run you can bet you last euro that the left will achieve that by an electoral pact if nothing else!