25 January 2015

First official Greek election results

In an even larger than expected victory, SYRIZA has almost secured an absolute majority in the new Greek parliament. The latest projections credit the anti-austerity party led by Alexis Tsipras with 149 seats, only two seats short of an outright majority. SYRIZA holds nearly twice as many seats as New Democracy, the centre-right party of outgoing Prime Minister Antonis Samaras (the data have been updated from the first projection which put SYRIZA on 150 seats).

New Democracy 76
To Potami 17
Golden Dawn 17
Communist Party 15
Independent Greeks 13

First official estimates of new Greek parliament

The first results of the Greek general election in January 2015 show SYRIZA almost winning an absolute majority. Possible coalitions include with the Independent Greeks or To Potami, though results could well shift enough for SYRIZA to have an overall majority. Source: Greek Interior Ministry and Open Europe.

How is a new government formed in Greece?

  • As early as tomorrow, Greek President Karolos Papoulias will task the leader of the largest party – Alexis Tsipras from SYRIZA – with forming a government. Tsipras will have three days to do so, or else he must hand back the mandate.
  • If a new government is formed, it must be given a vote of confidence by parliament within fifteen days from the date the new cabinet is sworn in.
  • If Tsipras fails, the mandate then passes to the second party, and then on to the third. Each would have three days to strike a deal.
  • If all three attempts fail, Papoulias will try to form a unity government – as in 2012. If no deal can be struck, a caretaker government will be appointed, the parliament dissolved and new elections called.

What are the possible coalition scenarios?

There are two likely coalition scenarios (neither looks perfect). SYRIZA may still get an outright majority, but it would be a wafer-thin one. With tough Eurozone negotiations ahead and the potential for MPs to rebel, SYRIZA may well look for a coalition, not least because it will have a very strong hand to play.

SYRIZA and the Independent Greeks (ANEL)

  • At first glance, this looks like an unlikely alliance given that ANEL is a right-wing party. But they have worked together in opposition, importantly to block the election of a President and thereby triggering these elections. Crucially, they also agree on the need to reject the previous government’s bailout commitments, restructure Greece’s debt and end austerity. As such, a coalition could prompt a particularly tough negotiating stance from the new government
  • They would hold 163 seats in the Greek parliament, giving them a pretty strong majority. However, they do disagree on a number of other important issues (for example migration policy). Therefore, doubts would remain over the stability and the longevity of the coalition. One option would be for a looser alliance, with the ANEL pledging support on certain key issues such as negotiations with Eurozone partners over Greece’s debt.

SYRIZA and To Potami

  • Throughout the election campaign, the centrist To Potami has been touted as the potential kingmaker and coalition partner for SYRIZA. However, for all the talk, the party itself has been cautious. While it agrees with SYRIZA on the need for some debt relief, less austerity and a higher minimum wage, To Potami is strictly in favour of sticking to the country’s European commitments.
  • Still, a deal could be possible and would give the new government a 166-seat majority.  From a European perspective, this coalition could be seen as more moderate.

 Other coalition set-ups look unlikely

  • It would be politically impossible for SYRIZA to strike a deal with either of the current governing parties, PASOK and New Democracy, whom Tsipras has roundly attacked for years. Coalitions between SYRIZA and the Greek Communist Party (KKE) or the neo-Nazi Golden Dawn are non-starters.

What might a SYRIZA-led government do?

Eurozone 60%
IMF 10%
ECB 6.2%
Greek banks 3.4%
Foreign banks 1%
Bank of Greece 1%
Other bonds 15%
Other loans 3%

Who owns Greek debt?

Following a series of bailouts and a debt restructuring a large majority of Greek debt is held by public institutions. This means that any renegotiation will be a very political exercise and will require approval and concessions from Eurozone partners.Source: Greek Finance Ministry, Bank of Greece, ECB & Open Europe.

SYRIZA has spelled out its economic plans in the so-called ‘Thessaloniki programme’. The main proposals include:

  • Write off “the greater part of [Greek] public debt’s nominal value”, ideally through a ‘European Debt Conference’. The repayment of the remaining part of Greek debt would be made conditional on economic growth. SYRIZA also wants to suspend the payment of interests on Greek debt.
  • Boost public investment by at least €4bn, “gradually reverse the injustices” of the EU-IMF bailout programme and gradually increase salaries and pensions to boost domestic demand and consumption, including raising minimum wage to €751 per month (from €683 now).
  • €2bn project to tackle Greece’s “humanitarian crisis”, including: free electricity for 300,000 households currently under the poverty threshold; meal subsidies for 300,000 families without income; and free healthcare for uninsured unemployed.
  • Scrap the existing property tax and replace it with a levy on large property. This would cost an estimated €2 billion. The no-tax threshold would be raised to €12,000 per year, at an estimated cost of €1.5 billion.
  • Restore employee protections to pre-bailout levels and scrap rules allowing for “massive and unjustifiable lay-offs” of workers.
  • SYRIZA estimates total cost at nearly €11.4bn but with revenue gains of €12bn – thanks to job creation, new measures on the settlement of tax arrears, and the fight against tax evasion. In other words, SYRIZA claims that its economic plans would ultimately be budget neutral. However, the Greek Finance Ministry has said such plans would cost at least €17.2 billion.

SYRIZA will be short on time and money

SYRIZA will have to move quickly in negotiations with its European partners. The current bailout extension is due to expire at the end of February. If no programme is in place, this could see Greek banks lose access to ECB funding as Greek bonds will no longer be eligible as collateral. With uncertainty over the bailout programme, the ECB could also choose to apply pressure by threatening to cut off access to the Emergency Liquidity Assistance (ELA), as it did with Cyprus in 2013.

Greece also has significant bond repayments in July and August, totalling over €7bn. With cash reserves already at a record low of €2bn and reports of numerous taxes going unpaid since the Presidential election was called in December, the new government will be short on cash. SYRIZA’s answer is to issue more T-bills (short term government debt) but this would require approval from the EU/IMF/ECB Troika. If they went ahead anyway, the only buyers would be Greek banks, however, they require liquidity from the ECB to make such purchases.

How might a compromise look?

  • Any serious debt write-down will be hard to strike. Firstly, the IMF and ECB will almost certainly not agree to renegotiating the €52bn of debt which they hold. A restructuring of the private sector debt totalling €82bn would also be difficult for a number of reasons: the new debt is issued under English law and would be tougher to legally restructure, €14bn is in T-bills which are generally exempt and a decent chunk is held by Greek banks as capital/collateral which they need to survive. This leaves just the outstanding Eurozone loans to be restructured, but this would require unanimous acceptance and approval in a number of national parliaments. Finland, Germany and Netherlands have all ruled out such a proposal already – not least because such a move would de facto create a fiscal union in the Eurozone and set a precedent for all other countries who have received bailouts.
  • Greek economist and SYRIZA’s potential Economy/Finance Minister Yanis Varoufakis laid out a proposal in an interview with El Mundo, saying that a SYRIZA-led government could request turning the outstanding loans into bonds which are conditional on them achieving the nominal growth forecasts laid out by the EU/IMF – close to 7% average per year according to Varoufakis.
  • A likely compromise would be another round of ‘extend and pretend’. This would involve easing the repayment schedule on the EU loans and reducing the rates further – though there is little scope to do the latter since they are already basically at market rates. For example, the original bilateral loans to Greece charge only 0.5% above market rate (around 1% in total). A more promising avenue would be a moratorium on interest and capital payments until Greece reaches a certain level of growth.
  • This could be tied with reduced oversight and easing of the reform programme. However, again this is now also mandated for countries outside of bailouts due to the new economic governance system. As Portugal has found it is hard to get away from these reforms.
  • Clearly, the situation is very uncertain. A full write-down looks impossible politically and legally for the Eurozone (at least without further moves toward pooling sovereignty), while a token rescheduling of debt is unlikely to satisfy SYRIZA supporters, even if tied in with reduced austerity.

What are the chances of Grexit?

As we noted in our recent two-part blog ‘Revisiting Grexit’, the balance of power has shifted somewhat. The Eurozone is rightly less concerned by financial contagion from a Greek euro exit. Equally, the Greek economic situation has improved to the stage where it may be able to manage the economic and financial fallout for a Grexit. That said, it would still undoubtedly be more painful for Greece than the Eurozone. Furthermore, the large majority of Greeks still want to stay in the euro at all cost – 76% in polls earlier this month. This means Greece is unlikely to unilaterally leave the euro. However, the thin ground for compromise means that the negotiations will be particularly tricky and that a Grexit, while unlikely, cannot be ruled out at this stage.

The rest of Europe is watching

Whatever happens, Greece has once again become the Eurozone’s testing ground. Anti-establishment parties across the bloc, such as Podemos in Spain and Front National in France will be watching the negotiations closely. Allowing Greece a compromise could well spur them on and signal a huge shift in the bloc’s approach to the crisis. Equally, refusing to compromise could undermine their proclamations of change. That said, it could also further fuel the popular backlash against EU-mandated austerity.

Whatever the outcome of the negotiations, there is a sense that this time is different. There is a stark divergence between two entrenched positions. The implications will be felt across Europe. While a compromise could still be possible, it will be quite painful to reach and will imply someone taking big steps back from their previous stance.