CIO FLASH – Greek elections
Syriza victory – And now, what’s next?
As expected before the week-end and as per the latest prior polls, leftwing party Syriza has won the elections in Greece, with no real
surprise. Negotiations are now going to take place between parties, as
for a majority and a government to emerge. This will be the first step
before any start of discussion with the Europeans on the debt subject.
A compromise will need to be found as to allow Greece avoiding a
default and/or a banking crisis, which could ultimately lead to its exit of
the Eurozone.
In details
1) Left-wing party Syriza won the legislative election for the first time ever, falling short of an absolute majority by
2 seats, obtaining 149 seats at the parliament out of the 300.
2) Alexis Tsipras and his party received 36.4% of votes, while Prime Minister Antonis Samaras’ New Democracy
conservative party received 27.8%.
3) According to the Greek constitution, Syriza has now three days to form a new coalition. If the negotiations fail,
New Democracy, as the 2nd ranked party, will have three days to form a coalition. And if that does not succeed,
Golden Dawn, the 3rd ranked party, will have three days to do the same. Considering the 50 bonus seats that
Syriza has received as the elections’ winner, the 2nd and 3rd ranked parties would need Syriza in the coalition to
succeed in case of. If the entire process fails, the president will try to form a unity government. Otherwise, a new
election will be called, as happened in 2012.
4) Following the formation of the coalition, the parliament will first meet on February the 5th. The next day, the
presidential vote will take place.
And now?
During his speeches, M. Tsipras outlined a six-point program that included:
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A definitive solution to the issue of debt sustainability
Increasing tax-free allowances to EUR 12,000
Installing a broad property tax to replace the current real estate tax
Fighting corruption
Dignity for all
Humanitarian initiatives
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Obviously, out of these 6 points, the issue of debt sustainability is the one on which the international investors are
the most concerned about, considering that the left-wing party has historically been opposed to a bailout regime.
This has fueld concerns about a potential Greece’s exit from the European Union.
At the time of writing, while it is too early to call for a definitive outcome on this subject (since the new parliament
has even not be formed), here are next steps for Greece and our assumptions for the future:
1) Change of wording
Although Alexis Tsipras initial position has not been ambiguous about Greece’s debt and current austerity
measures, it has recently evolved to a more balanced profile, since more than 70% of Greeks want to stay in the
European Union. This has been confirmed by his recent statements such as “German taxpayer has nothing to
fear" and "it is not our goal to aim for a confrontation with our partners". It comfort us in the fact that Greece
may not adopt a drastic position towards negotiations with the European Union and its creditors, and thus we
see low probability for the time being of a straight default option of the Country.
2) Discussion with the European Union
Assuming a coalition is formed, the next step for the Government will be to work on a proposal, as to start
discussion with the Troika. Remembering that the current EFSF funding program is due to expire in one month
time, it should come quite quickly. Now considering Greece issues on one hand and the Troika requirements on
the other, it appears quite clear in our view that both parties will have to make concessions. While M. Tsipras
will have to work within the original Troika’s agreements (including structural reforms, maintenance of a
primary surplus, no face value debt relief, …), the Troika on its side will have to review the scope for the
composition of the adjustment and reform efforts. Failing to do so may jeopardize current EFSF program and
any further to come, and going forward may force Greek Banks to ask for Emergency Liquidity Assistance
Program of the Bank of Greece (while cutting-off Greece from the Eurozone payment system). As previously
stated, the timing for negotiations should start quite quickly, keeping in mind that apart from the EFSF program,
Greece will have significant debt maturities to cope with in July this year already, and should not wait too long…
3) ECB, QE and the Troika
Considering the recent Quantitative Easing measures announced by the ECB, it may put further pressure on
Greece as to seat around the table with its creditors and look forward for an agreement. As part of the QE
measures announced and as a remembering, the ECB should start buying Greek government bonds early June
“if” and only “if conditions are met”. While we should not underestimate M. Tsipras determination to
renegotiate current bailout terms, it may add to the negotiation position of the Troika ahead of Greece funding
needs.
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4) “Grexit”, an option, an utopia or a reality?
While considering the Greece point of view, an exit of the European Union can be a solution. It is possible that
wiping out the debt and revaluing the currency would turn over the long-term the Greek economy around,
spurring the country’s key tourism industry, rebuilding manufacturing, creating jobs and transferring wealth
from the elites to the people who backed the new prime minister. However, leaving the Euro will not be an easy
call for the new government and would cause an immense and immediate economic pain. The question that is
arising is whether this pain would be worth it in the long run. Just considering i.e. a practical problem alone such
as “how fast can you create new physical currency and coins to replace euros?” looks quite difficult to answer.
Being shut out of the international loan market and facing capital flight will have a significant immediate drag on
Greece’s economy and would hit Greeks standard of living big time. But, as mentioned and questioned before,
can Greeks live with it for a short to medium-term point of view, while looking at a brighter future “after”? This
is the question and not our core scenario. We assume a low probability for it for the time being.
Now, from an European point of view, can European Union cope with a Grexit scenario? Coming back few years
ago when Greece issues emerged, we would have say “no”. Now, time has passed and European Union has put
in place several institutions, programs (such as the European Stability Fund)), … as to be able to financially deal
with it. So as of today we would assume that it can. It will obviously not be without negative impacts for the
Europe, whatever we consider the psychological impact of such a move or the potential “temporary” loss of
confidence from investors and the volatility it may cause with trade partners (such as US and China). But as
stated, financially, Europe should be able to manage it. The current issue for the European partners is
unfortunately not the Grexit itself, but the potential threat of contagion to other countries such as Spain or
Italy. Should this exit story materializes and in few years time sees Greece recovering (as described above), then
it may start pushing other countries to follow the trend, and thus may generate even bigger issues for European
partners… since they will have to deal with even bigger negative impacts.
And so, what can we expect? At the current stage, and as previously outlined, first and not least, the left-wing
Greek party has been less drastic recently with regards to a potential straight default of the country and an exit
from the Europe Union. Secondly, European partners (and the Troika) were initially quite inflexible to
renegotiate debt terms and further support, but have started as well to balance their requirements. It looks like
that Greece may play his card through a “poker party” to try to obtain as much as possible relief, while
European partners know already that they will have to give up on some points to avoid a much broader issue. It
may accordingly be in the interest from everyone to find a compromise, and it currently represent our core
scenario for the time being.
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Important coming dates:
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28th of January 2015
28th of February 2015
July 2015
August 2015
: Coalition to be formed
: Expiration of the European Financial Stability Facility (EFSF) program
: € 3.5bln debt to be repaid to ECB
: € 3.2bln debt to be repaid to ECB
Market reaction and expectation
As of the time of writing this letter, the markets have reacted pretty well to kind of a “non-event” news. As initially
expressed, the left-wing party’s victory was expected since few days already and “priced-in”, whatever we consider
the EUR, the European bond market or the equity market. Now, what will be more important over the near-term
will be the outcome of the negotiations that will come over the next few weeks, and on which we will keep you
posted. In the meantime, while we cannot exclude to have some volatility here and there, based on declarations
that can be done from both parts, the focus and the main driver for the markets will remain the impact of the recent
ECB Quantitative easing measures (refer to our CIO Flash – ECB & QE, dated 25th of Jan), both from an economic and
a market perspective. We thus remain supportive of risky assets for the time being as we do not foresee a “drastic
and negative” scenario. EUR trend to remain on the downside, while EUR Corporate bonds and European Equity
markets to benefit from the QE measures.
David Finazzi
Chief Investment Officer
AlphaSwiss Partners
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