Coalition row over public broadcaster gets nastier by the day in Greece

Ten days ago, we wrote a blog asking, "Will the closure of the public broadcaster set the scene for a coalition showdown in Greece?" Yes, it has. And it's looking nastier by the day.

Greek coalition leaders met for the third time this week yesterday, but failed once again to strike a deal on the future of the country's public broadcaster ERT. This despite Prime Minister Antonis Samaras offering to re-hire as many as 2,000 old employees to resume broadcasting. Democratic Left, one of Samaras's junior coalition partners, could pull out of government as early as today.

This would leave the government with a wafer-thin majority of 153 seats out of 300 in the Greek parliament, although Samaras could try to win support from some of the 14 non-attached MPs on a case-by-case basis. Not ideal only one year after the coalition was formed, although it could avoid the prospect of snap elections.

Democratic Left MPs are currently in talks with the party's leader, Fotis Kouvelis, to make a decision. An announcement is expected shortly.

How did the problems escalate to this point?

Although the closure of ERT instantly flared up coalition tensions, it does seem surprising that the Prime Minister's party New Democracy (ND) has allowed it to get to this point - where a coalition split is a real possibility. On the surface, it seems it would be simpler for ND to give in and re-open ERT at least temporarily (that is after all what even the Greek Council of State suggested). However, this misses the confluence of problems which the Greek government is currently facing:

• The government is falling well behind on the sacking of civil servants and the necessary savings this delivers. It has agreed to dismiss 4,000 public sector workers by the end of this year and put a further 25,000 into the labour reserve (where they receive a reduced salary). Closing ERT instantly delivers up to 2,600 layoffs - though part of old ERT employees would presumably be hired once the revamped broadcaster is created. The EU/IMF/ECB Troika is ramping up the pressure for clear evidence that these promises will be fulfilled.

• The privatisations programme, due to raise €2.6bn this year, is clearly off track. This is mostly due to the failure to sell the natural gas monopoly DEPA. This funding gap must be filled from within the government's existing budget - and no concrete plans have been put forward so far.

• A further €1bn financing gap has opened up in the National Healthcare Provision Organisation (EOPYY), while the Troika remains unconvinced of plans for a new property tax which was forecast by Greece to boost revenue.

• Furthermore, the IMF could suspend the payout of the next tranche of Greek bailout funds due next month unless eurozone leaders plug a €3bn-€4bn shortfall in the country's rescue package. Compared to the internal funding gaps above, this is an external one which has arisen due to euro area national central banks refusing to roll over their holdings of Greek bonds as had been agreed under the last revision of the Greek bailout (as we reported in yesterday's press summary). Eurogroup Chairman Jeroen Dijsselbloem moved quickly to deny the reports, adding that "the [Greek] programme is fully financed for at least another year."

Therefore, the sum of these factors has escalated the ERT issue into one which could potentially undermine the coalition. The opening up of a new financing gap is hardly surprising, and is actually something we predicted at the start of this year.

As noted above, if the Democratic Left exited the coalition, the Greek government would still hold a majority in parliament, albeit a wafer thin one. Support from the Democratic Left on certain issues could be expected, but would of course no longer be guaranteed.

The Greek government is likely to face some very tough decisions in the near future. An erosion of its power now could make pushing these decisions through significantly more difficult.