What next for Greece?

We have today published a Q&A on Greece's future in the eurozone in light of the results of yesterday's elections. Here we go:

What happens now?
As the largest party, New Democracy (ND) will lead talks on forming a coalition government. The starting point will likely be negotiations over a ‘national unity government’ which tries to incorporate as many parties as possible. If ND fails, the mandate would normally pass onto the second and third largest parties, SYRIZA and PASOK respectively. However, SYRIZA has said it will reject the mandate, while PASOK called for it to be passed straight to Greek President Karolos Papoulias. ND still looks likely to lead the first talks, but if these fail Papoulias will take over. Given the risk of a eurozone collapse, most political leaders in Greece accept that not forming a government is not an option. Once a government is in place, negotiations with European partners will begin.

Is a national unity government likely or possible?
We don’t think so. SYRIZA has already ruled out governing in tandem with ND, and has consistently rejected the austerity measures attached to the Greek bailout programme. Throughout the election campaign, SYRIZA leader Alexis Tsipras has been incredibly critical of ND and the ‘old guard’ of Greek politics – which he blames for the corruption and economic problems Greece is now facing.

But wait, hasn’t PASOK ruled out joining a coalition without SYRIZA?
It is true that yesterday PASOK leader Evangelos Venizelos called for a minimum four-party coalition and suggested he would not join a coalition which did not involve SYRIZA. However, we believe this to be largely political posturing. PASOK has seen its vote share eroded by SYRIZA and is therefore keen to exploit its position of power as kingmaker to ensure it does not lose further support. The party is also wary of being stuck in a coalition with only ND where it would be overwhelmed. We believe PASOK would join a coalition as long as it involved other parties beyond just itself and ND. As an alternative, PASOK could pledge its votes in parliament to allow the new government to pass EU-mandated austerity measures. Ultimately, PASOK has supported Greek membership of the euro and the current bailout programme, while Venizelos is aware of how costly new elections could be meaning it is likely to compromise. Somewhat ironically, he has already argued that there is no time for “political games” when it comes to forming the new government.

What could a new government look like and how strong would it be?
We believe a likely coalition would be ND-PASOK-Democratic Left. This would have a fairly strong majority with 179 seats in parliament. However, it would face a strong, motivated and more unified opposition in SYRIZA. This coalition government, although broadly pro-euro and accepting of the bailout programme, would still be marred by disagreements over the level of ‘austerity’ and the correct way to promote economic growth (ultimately it is an ideologically mixed right-left coalition).

Is a third election possible?
Yes, although it seems the least likely option at the moment. Interestingly, there is a precedent in recent Greek history – the Greeks have previously had to vote three times in less than a year (June 1989, November 1989, and April 1990) before a stable government could be formed. All the political parties know that a third election would now be the worst possible outcome – not least because Greece would run out of cash before the new vote takes place, probably towards the end of the year, while eurozone leaders look unlikely to lend into a black hole (in governance terms). Therefore, a compromise is likely. However, if SYRIZA stays out, the new coalition would inevitably be a weak one (as noted above), meaning that new snap elections may well be called in six months’ time.   

What prospect is there of a renegotiation in the bailout agreement?
Eurozone leaders hinted strongly ahead of the election that if a broadly ‘pro-bailout’ coalition was formed some easing of terms would be forthcoming. This looks to have been confirmed by German Deputy Finance Minister Steffen Kampeter who said Germany expected the new Greek government to honour its existing commitments but added that Athens should not be pushed too hard, saying, “It is clear to us that Greece should not be over-strained.” German Foreign Minister Guido Westerwelle said there could not be “substantial changes” to the agreement but that he could “well imagine talking again about timelines.”
One big question is whether eurozone leaders will push for SYRIZA to provide a supporting signature – we think this is unlikely given the party’s opposition – but ultimately the support of a broad coalition with 179 seats may be enough for eurozone leaders.
Any adjustments are likely to be small focusing on lower interest rates, extended repayment periods and EIB funds for Greece. Some adjustment in the deficit cutting programme may be possible, although only to account for the delays to the plan due to the two Greek elections.

Will this solve the eurozone’s and Greece’s problems?
No. Even with adjustments to the bailout programme, it still looks virtually impossible for the country to meet the various austerity targets. Missed targets will continue to be a source of disagreements and controversy, particularly inside Germany, while the continued EU/ECB/IMF Troika presence on the ground in Greece means that any delays will come to light quickly. Therefore, Greece’s future in the eurozone remains uncertain. For the single currency as a whole, should a compromise be possible in Greece, the focus of attention will shift back to Spain – whose banks remain a major liability for the euro. 

So what chance is there for a third Greek bailout?
Politically, providing a third bailout for Greece would be incredibly difficult for the likes of Germany, Finland and the Netherlands, which would all struggle to get parliamentary approval. From the Greek side, it is hard to imagine even a pro-euro coalition signing up to a new strict ‘Memorandum of Understanding’ detailing further ‘austerity’ for Greece. At best, extra cash might be put on the table if a move towards a fiscal or banking union is close, but this will not happen anytime soon. We expect that a more fundamental decision over Greece’s eurozone membership will need to be made before this money runs out, within the next six to nine months.

Why doesn’t Greece just leave the euro now and move forward?

• There are clear economic benefits to Greece leaving the euro, but the risks involved in an imminent exit could well outweigh these benefits in the short term. We estimate that if Greece left the euro now, it could still need between €67bn and €259bn in external short-term support, potentially split between the IMF, the Eurozone and non-euro countries including the UK. These figures do not include longer-term support or contagion costs to the rest of the Eurozone.
  

• A Greek exit and the withdrawal of ECB support would almost certainly lead to the undercapitalised Greek banking sector collapsing. To avoid a massive bank run and huge losses to pensions, we estimate that banks and pensions funds between them would instantly need a €55bn injection of fresh capital, which would be difficult for Greece to afford without external support.
  

• The new Greek Central Bank would also need to create at least €128bn worth of the new currency (63% of Greek GDP) in liquidity to help keep Greek banks afloat. This could trigger high levels of inflation, though these might only be temporary.
  

• Despite a compromise being likely in the short term, as Greece approaches a balanced budget and a more stable banking sector, though still messy, an exit will look increasingly attractive – particularly if the only alternative for Athens is to permanently give up economic and political sovereignty.
  

P.S.: You can find more details on this specific point in this briefing we published last week.

How exposed are EU countries to Greece now?
Open Europe estimates that the EU countries have a total exposure of €552bn to the Greek economy. This comes through various sources including: the two direct bailouts, central bank lending (ECB monetary policy, ECB Securities Markets Programme, Target 2 and Emergency Liquidity Assistance) and exposure of these countries banking sectors to Greece. This has increased by a massive 67% since June 2011, despite little progress being made on reforming the Greek economy or solving the wider problems in the eurozone.

€ Billion	Total Exposure to Greece
Eurozone:	Austria	15.5
	Belgium	17.7
	Cyprus	1.1
	Estonia	0.7
	Finland	8.5
	France	138.9
	Germany	139.4
	Greece	7.7
	Ireland	7.8
	Italy	84.9
	Luxembourg	1.3
	Malta	0.6
	Netherlands	30.7
	Portugal	19.8
	Slovakia	2.7
	Slovenia	2.3
	Spain	55.7
Non-Eurozone:	Bulgaria	0.2
	Czech Republic	0.3
	Denmark	0.5
	Latvia	0.0
	Lithuania	0.1
	Hungary	0.3
	Poland	0.4
	Romania	0.3
	Sweden	0.9
	United Kingdom	13.5
Total		551.8