Greece goes to the polls this weekend. And it looks like it’s going to be messy. The potential for the “wrong” result to wreak havoc in the markets on Monday morning is real.
The outcome is very difficult to predict due to the incredible fragmentation of political support within the country and the rise of marginal parties. Many of these are deeply opposed to the austerity measures, the euro and the EU/IMF programme. As a result, mainstream parties have been dragged away from the centre.
The most recent indications are that the two major parties that form the bulk of the current ruling coalition, New Democracy and Pasok, can together scrape in about 30-35 per cent of the vote. Opinion polls are not allowed in the two-week run-up to the elections, so these are the latest measures of voter opinions we have:
It’s not a comforting sight. Clearly support for the left is much stronger than for the right, but support for the bailout programme is low on both sides of the political spectrum. Moreover, the communists (KKE) and Golden Dawn on the far right are in agreement that Greece should leave the euro.
The economic research team at Credit Suisse has a handy chart summarising where the different parties stand.
The good news is that New Democracy is highly likely to end up with a substantial chunk of the parliamentary real estate due to a quirk of the Greek political process. There are 300 seats in total, but the party with the most votes gets an extra 50 seats (irrespective of its share of the votes). A party needs more than three per cent of the vote to get any seats, so that could rule out a couple of the more wacky ones. The remaining 250 seats are allocated on the basis of proportional representation.
Credit Suisse outlines the likely scenarios as they see them:
Scenario 1: New Democracy – PASOK coalition. This is the most likely scenario, in our view. Despite their pre-election announcements – in light of the international pressure and the lack of other alternatives – the two parties are likely to form a coalition government. Based on the poll numbers – if nothing fundamentally changes – this would be a rather weak coalition. It is expected to implement the EU/IMF programme, however frictions between the coalition members are likely. It is also expected to face strong opposition by the anti-bailout parties, especially if it does not have the majority of the votes (lack of strong popular mandate). It would be a rather fragile government, whose stability would be largely determined from the economic outlook and the progress of the reforms, in our view.
Scenario 2: Broader coalition with the participation of other parties as well. Either due to a lack of parliamentary majority of the above coalition or the need to enlarge the popular base, a smaller party might be asked to join the coalition, e.g. the Democratic Left or the Democratic Alliance. This will allow for a stronger parliamentary majority, but the dynamics are not as straightforward. Taking into consideration the different programme goals of the members of the coalition – especially in the case of the Democratic Left – the government might not be flexible enough to implement the agreed reforms and a lot of the measures might have to be watered down, in order to be passed in parliament.
Scenario 3: New elections. If there is unwillingness from the New Democracy party to form a coalition government or attempts to do so fail, then new elections will follow suit. This outcome would be disruptive, at least in the short term, and questions regarding the implementation of the EU/IMF programme and Greece’s existence in the euro will emerge. In the new election it is possible that, in fear of an ungoverned country, part of the protest vote will be shifted towards the main parties, resulting in a stronger government/coalition, that would be in a position to implement its mandate. However, if this is not the case, the risk of a disruptive development will materially increase.
Worryingly, during the election campaign even the leaders of New Democracy and Pasok have floated the idea of renegotiating the EU/IMF programme. Yet Evangelos Venizelos, Pasok leader, argued on Greek television on Wednesday night that voters “should not take the country’s eurozone membership for granted and should avoid voting for parties that might put Greece’s future at risk,” according to Kathimerini. “Venizelos went on to say that it was a ‘lie’ to suggest that Greece could simply reject the terms of its bailout after the May 6 elections without suffering any consequences,” the paper reported.
However, the risks of trying to renegotiate the Memorandum of Understanding with the IMF pale into insignificance compared with the challenges the new government, whoever it is, will have in implementing austerity measures. Some €3bn-worth of spending cuts must be made immediately, and another €12bn are slated for 2013-2014.
As a result, argues the global economics research team at UBS, the biggest risk is for a temporary suspension of official sector financing, with worrying social consequences:
If Greece does not fulfil its commitments, we think it is entirely possible that the IMF, and in turn the EU, will simply refuse to make the next payment. However, it is unlikely in our view that payments would stop altogether – rather, they might be postponed until Greece fulfilled its obligations. This could generate considerable tension, with the Greek government quickly running out of cash and being forced to stop paying salaries and pensions. Social turmoil would almost certainly follow.
The markets, they argue, are unprepared for such a scenario (our emphasis):
The restructuring of Greek debt earlier this year appeared to many people to mark the end of Greece’s ability to upset other European markets. Even a temporary suspension of official sector financing could therefore be very damaging to European markets – as they consider Greece’s alternatives in the event that official funding were cut off permanently.
The likelihood of Greece leaving the euro is relatively small, the UBS team argues, as voters are generally in favour of keeping the single currency, but the taboo of discussing an exit is gone. Such talk, and the implications for a euro-exit for Spain and Italy, could send the markets into a spin.
Underlying all these concerns are more fundamental issues of social turmoil in Greece. As austerity drags on, support for both Communists and the far right is rising, making it more difficult for moderates to hold on to power and make the necessary compromises. If the new government after is unable to pay wages its employees and pensions to the retired, voters may plump for increasingly extreme options. Earlier this week Venizelos’ was reduced to appealing to voters not to allow “neo-Nazis goose-step into parliament”, but there’s a good chance they might.