Freitag, 19. Dezember 2014

Political uncertainties over Greece may bring back the Euro-Crisis. By Michael Wohlgemuth

Recently, the Greek parliament failed to support the election of the Greek government’s presidential candidate Stavros Dimas – who gained 160 votes, well short of the 200 needed. A second ballot will be held on 23 December, with a final third round potentially on 29 December. If this fails to provide a result, national snap election early next year might bring the far left Syriza party to power. This, in turn, could bring EU support for Greece to an end and might eventually lead Greece to leave the Eurozone. What are the odds that another Greek drama evolves?

Political uncertainties, financial turbulences

Greek Prime Minister Antonis Samaras ’s candidate for the presidency, former European Commissioner Stavros Dimas, failed to win enough support in the first round of parliamentary voting on Dec. 17. The candidate, a former European Commissioner and Greek Foreign Minister, has wide appeal, a serious reputation and is respected by European partners.

Nevertheless, only 160 members of the chamber backed the candidate, clearly short of the needed two-third majority of 200.  The government, a coalition of the conservative New Democracy and socialist Pasok parties, holds only 155 seats in the 300-seat Parliament.

A second vote is scheduled to be held on Dec. 23. If, as seems very likely, the government fails again to reach a two-third majority, there will be a third and final round, with a lower 180-vote threshold, tentatively scheduled for Dec. 29.  

Meanwhile, Samaras will try and gain enough votes of more than twenty independent MPs and renegade deputies in two smaller parties who stand to lose their seats after snap elections.

Such snap elections become mandatory under Greece’s constitution if there is no majority for a Presidential candidate. The date could be end of January.

Alternatively, Samaras could try and reach an agreement with the opposition to delay national elections until later, with a temporary unity candidate for President stepping in. At the moment, this seems not very likely since major opposition parties from the radical left and right hope to gain seats at early national elections. Especially, the far-left populist Syriza party still leads the polls and is therefore looking forward to snap elections.

This is why the latest turbulences on Greek financial markets were a clear sign of investor fears over political uncertainty in Greece. Its main stock index was down 21% in three sessions (its sharpest fall since 1987) after Samaras’ decision to hold the Presidential elections this year instead of February next year (the incumbent President leaves office in March 2015).

Equally alarming was the reaction of the bond market: Yields for Greek government bonds with a five year maturity climbed to 9.7 percent on Dec. 16 – the highest level since Greece had to restructure its debt in March 2012.

How will Greece be able to fund itself?

This raises the question: how will Greece be able to fund itself? In Dec. 8., Eurozone finance ministers agreed to grant Greece a “technical extension” of 2 months to its bailout which was due to finish at the end of this year. This was to allow the final quarterly review of the bailout programme to be completed – a necessary step to ensure the reforms are in place which in turn will allow to release the final cash payment from the Eurozone.

This extension encouraged the Greek government to hold its Presidential election now instead of – as formerly planned – in February 2015. As a consequence (certainly foreseen by Samaras), it has become much more difficult for the Troika (EU-Commission, European Central Bank and International Monetary Fund) to reach substantial agreements on the bailout’s requirements of a completion of reforms with a Greek government now in urgent campaign mode.

The Troika now has to reckon that there is not much the Greek government can do without harming its vote share further. And, as both EU-President Jean-Claude Juncker and EU-Commissioner Pierre Moscovici have already made clear: the EU more or less openly supports the present government in order to avoid political turmoil with snap elections and a possible Syriza win.

As a consequence, there will also be little progress on exactly how Greece will fund itself for the next year (and beyond). Eurozone creditors have already said they are supportive of granting Greece a “precautionary” credit line – and it seems almost certain that Greece will need to tap it. 

According to a document submitted to the German Bundestag as part of its approval process of the extension of the Greek bailout, a €10.9bn precautionary credit line could be forthcoming after the bailout ends in February. The document also says that the European Commission puts Greece’s funding needs for next year at between €6bn and €12bn.

However, the further involvement of the IMF remains unclear. Both government and media in Greece harbour particular resentment towards the IMF to which Greece is due to pay out another €9bn in 2015 and 2016. If the IMF stays involved, it will need guarantees that Greece will be able to fund itself for 12 months, and if the IMF leaves its funding stream will need to be replaced – most likely by EU bailout funds.

Taking political advantage of uncertainty

It seems that it is exactly this uncertainty that the Greek government wants to use to its own advantage in a risky gamble. The reform “dictates” of the troika are extremely unpopular; but at the same time foreign credit is still badly needed. Samaras plays the fear card quite forcefully, by warning of imminent Grexit (Greece leaving the Euro) consequences if Syriza comes to power.

The government claims that it has proven it can negotiate with the Troika and has a track record of managing crises; which Syriza does not. Fear of chaos and the consequences of “Grexit” may, together with several statistical signs of economic improvement, affect peoples’ voting and thinking. Recent polls suggest that more than half of Greeks say they don’t want early national elections and indicate that Syriza’s lead is slightly shrinking.

Still, observers estimate that there is a 50:50 chance that the Presidential elections will fail to produce a result and thus snap elections end of January 2015 will need to be held. But even if Samaras’ scheme of scaring people away from Syriza works out, there might still remain a 50:50 chance of a Syriza win. And one needs to remember this peculiarity of the Greek voting system: the party with most votes will be given a 50 seats premium in parliament.

That adds up to a 25 % chance of a Syriza-led government early this year.

What does Syriza want?

But what would the new Greek government do? Syriza claims to support euro membership whilst promising to ditch the austerity measures, to increase wages and pensions and to reject or undo almost all of the troika’s demands for reforms which accompany the bailout.

Instead Syriza wants to go for massive debt restructuring. This easy way out of debt however seems very unlikely to be accepted by the creditors. All this could leave a Syriza government with the uncomfortable alternative to either opt for “Grexit” or drastically tamper its radical position held so far.

Fundamental questions remain unanswered

Whatever the outcome of the Presidential elections or the eventual national elections, the Greek tragedy will not see a sudden and happy finale. Despite some firstsigns of growth of 1.7 percent over the last 12 months (after losing a quarter of its GDP since 2008) and despite an optimistically estimated “primary” budget surplus (before debt repayments) of 3 percent, Greece would still have to re-roll its public debt of over 170 percent relative to GDP – a Sisyphus task that most economists believe is impossible without sustained and substantial outside help.

Serious doubts are justified because two fundamental questions have never been really answered: how to fund Greece in the medium or long term as its economy tries to recover and regain competitiveness with a currency that cannot devaluate. And: how to reform Greece as its government tries to deal with entrenched corruption, incompetent administration and ineffective tax-collection with a political system that might take generations change.

Snap elections in Greece will most likely not provide the answer.

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