Grexit Unlikely but Leftist Party to Press for New Debt Terms after Taking Office (1/27)     Print Email

spellmanBy James D. Spellman, Strategic Communications LLC

An astounding victory by the populist, leftist Syriza (συριζα) party Sunday, larger than polls had been predicting, calls into question the ability of Brussels, the International Monetary Fund, and the European Central Bank to continue demanding "austerity" programs aimed at reducing onerous government debt believed to be constraining Eurozone growth.

Winning 149 seats in Parliament, two short of a ruling majority, Syriza formed a coalition with a small, right-wing party, the Independent Greeks (Anel), which also opposes austerity, the media reported. The new prime minister, Alexis Tsipras, said the "mandate" calls on him to negotiate "a new viable solution… for Greece and Europe" with Greece's European partners. The IMF and the European Commission have lent Greece €240 billion euros ($270 billion) since 2010 after Athens committed to reforms. Repayments are due as early as March.

But “Grexit,” Greece leaving the European Union, is not likely, Tsipras emphasized in an interview with the Greek weekly Realnews. “It’s clear from any point of view that the subject of Greece leaving the euro simply does not exist,” he said. “Our common future in Europe is not austerity, it’s democracy, solidarity, and cooperation,” he told the French newspaper Libération. And, most Greeks – nearly three-quarters according to one poll – want Greece to remain in the Eurozone, as do Europeans generally. Divisive campaign rhetoric of the winning party typically softens after the votes are tallied, and this seems to be so with Tsipras.

When markets opened the morning after the election, the euro fell below $1.11 before settling slightly higher at $1.12. This shows that investors continue to be driven mainly (at least for now) by the ECB’s announcement last week to pump an unprecedented €1.1 trillion ($1.3 trillion) into the Eurozone economy. Since January, the euro has lost 10 cents against the dollar, and at $1.12 is more than three cents lower than before the ECB salvo.

“The market was largely anticipating a (Syriza) victory,” said Sebastien Galy, senior foreign exchange analyst at Société Générale. “At the moment, the market believes that if there is any (debt) restructuring it would only involve the official sector and for now, the possibility of Greece leaving the eurozone even with the incoming government is small.” [1]
Throughout Europe, newspapers looked at the impact of the Syriza victory on leftist movements gaining ground in EU member-states plagued as Greece is with high unemployment, massive public debt, recession, an embittered electorate, and political unease. Is Europe moving left, away from a centrist orthodoxy dominating politics since the Second World War? Anti-austerity parties are gaining ground in Spain (Polemos) and France (National Front).

Repaying Greece’s debt obligations -- totaling €318billion ($352 billion) or 160 percent of GDP – is the most pressing issue. Bailout payments (€7.2 billion or $8.1 billion) are only guaranteed until the end of February, and a payment to the IMF is required in March. Other payments come due this summer. Without fresh infusions of cash from the “troika,” Greece would have to default.

Will Brussels slash the amount Greece owes and still provide more loans with less onerous terms? Will the ECB’s new program to buy bonds of Eurozone countries be used to offload some of Greece’s debt obligations to the EU? Since the ECB already owns Greek debt that nears the bank’s limit under the new program, would ECB’s hands be tied to do more until at least July? To help Greece to the extent Syriza will demand, must the ECB raise the limits it set last week on both the total percentage of bonds it will hold from each EU member-country and the share of particular issues of sovereign debt?

Syriza wants to run a budget surplus (excluding interest) of 2 percent of GDP, not the 4.5-percent target the EU required. The incoming government also wants to slash loan obligations to free up public funds so the poor can receive more relief, laid-off government workers can be rehired, and taxes can be cut. Deregulation and privatization of government companies would be reversed, too. The minimum wage would be restored to the pre-crisis level.

For Brussels, there’s an extremely difficult path ahead. The EU has restructured debt and could do so for Greece, stretching out repayments and both forgiving and postponing interest payments – bold moves to underscore how critical Greece’s membership is for the Eurozone. Semaphores matter now. EU officials must send signals early that grounds for a compromise exist. Not doing so will likely accelerate euro withdrawals from Greece’s banks, further weakening the financial system. This would make assistance from the troika even more costly and the timeframe for Greece’s recovery, and Europe, far longer than analysts expect now.

Negotiating with Greece means negotiating, too, with other EU member-countries that obtained loans after promising implementation of austerity measures. Whatever deal Brussels negotiates with Athens will inevitably compel other EU member-countries to seek similar terms. The ECB’s “do whatever it takes” approach has limits and takes time to deliver results.

Rob Burnett, investment director and manager of the Neptune European Opportunities Fund, says Syriza has no incentive to cause further turmoil in Greece. “Alexis Tspiras is taking power, with Greece having just registered its first quarter of GDP growth in 7 years. Tspiras is aware that he has a tremendous opportunity to gather the plaudits as the economy recovers. We expect Syriza’s negotiation with the Troika, comprising the ECB, the European Commission and the International Monetary Fund, will be difficult but all sides are incentivized to come up with a face-saving compromise.”

[1]Reuters, “Euro steadies despite Syriza victory in Greece.” Irish Times, January 26, 2015.

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