The Potential for a ‘Grexit’ – or Not?

After Greek elections, Brussels and Berlin can no longer shun the issue of debt relief. 

Before the New Year, the Hellenic parliament rejected the nominee of Prime Minister Antonis Samaras for president. In accordance with the Greek constitution, a general election will follow on January 25. 

After Greek elections, Brussels and Berlin can no longer shun the issue of debt relief. 

Before the New Year, the Hellenic parliament rejected the nominee of Prime Minister Antonis Samaras for president. In accordance with the Greek constitution, a general election will follow on January 25. 

Once again, Brussels’s message is that any adverse outcome would undermine recovery in Greece and the Eurozone. Yet, massive bailouts have only deferred the inevitable – the confrontation between Brussels’s economic austerity policies and Greece’s political protest.

Squeezed political middle

Between 2008 and 2015 Greek GDP per capita, adjusted to inflation, tanked 30 percent to $21,570. In absolute terms, that is comparable to a collapse of living standards from the level of Israel to those of Libya or Gabon. In the process, Greece’s ranking in the global competitiveness index has plunged from 67 to 81, below Ukraine and Algeria.

The subsequent social devastation has translated to a new normal in politics. In half a decade, an entire generation of centrist politicians has been discredited in Greece. When the Eurozone crisis took off in spring 2010, Greece was still governed by the Panhellenic Socialist Movement (PASOK) led by George Papandreou, which dominated almost 40 percent of the vote, while the conservative New Democracy (ND) had about a third. 

Today, the shrunken PASOK has lost most of its support, while conservatives are struggling to stay in the government. Meanwhile, the support of former fringe parties has exploded. In the European election, the radical left coalition Syriza garnered 27 percent of the vote, against 23 percent of the conservatives, while the neo-fascist Golden Dawn won every tenth voter – more than PASOK.

Led by the young and shrewd Alexis Tsipras, Syriza has played down its radical left-wing left roots embracing a more populist stance. It has been preparing for its new role ever since 2012, when it appointed a “shadow cabinet.” In current polls, it garners about 28 percent of the vote, as against 25 percent for the conservative ND, even if this lead has narrowed somewhat. 

Recently, three MPs from the Syriza threatened to stop international debt repayments if the party comes into power after January’s elections. On the other hand, Tsipras has said that, even under Syriza, Greece would not abandon the Eurozone immediately.

So what will Syriza do if it wins? 

From social policies to debt relief

Today, we know that by 2012 German Chancellor Angela Merkel was close to permitting a Greek default. But the fear was that if the Greek contagion could not be contained, it could spread to Italy and Spain. As a result, Greece was given its second bailout, but only so that Italy and Spain would be ensured a two-year timeout to stabilize their economic turmoil.

Athens returned to markets after two huge bailouts of €73 billion ($88 billion) and €164 billion ($197 billion), respectively. Behind-the-façade talks have begun over a third bailout amounting to some €20 billion – €30 billion ($24 billion – $36 billion).

Vowing to challenge half a decade of austerity, Syriza seeks to launch a social-policy package that the Troika – European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF) – considers highly controversial. In contrast, Syriza sees the measures as first aid. 

The package includes a (big) haircut for creditors; tax cuts for all but the rich; an increase in the minimum wage and pensions to €750 a month; free electricity, food stamps, shelter and health care for those who need it; a moratorium on private debt payments to banks above 20 percent of disposable incomes.

But nothing makes the Troika as uneasy as Syriza’s pledge of an international conference on debt relief, vis-à-vis “official sector involvement” (OSI). Tsipras has already  addressed the issue in meetings with EC leaders, German’s finance minister Schauble and IMF bosses, while sending his economic advisors to the City of London to reassure investors that debt profiling would only involve OSI. 

In 2015, after some €250 billion in bailouts, Greece’s financial needs are estimated at almost €20 billion, which features interest payments, IMF funds repayments, ECB’s maturing bonds, and arrears – none of which can be easily delayed. 

Led by Samaras’s New Democracy, Greece might cover some of these needs with the hoped-for primary surplus, planned privatizations and creative financial maneuvering; but not without a funding gap of €5 billion – €10 billion. With Syriza in charge, the planned privatizations would be challenged, while primary surplus would become questionable, as Athens would push debt re-profiling. 

In both cases, the Greek election outcome will have an impact on the anticipated ECB bond purchases, which also depend on whether Germany will green light the ECB’s full QE – or not. 

In the past few years, Brussels has managed to build insulation mechanisms to reduce (though not to mitigate) the probability of contagion. These mechanisms, however, rely on the market expectation that the ECB is about to engage in broader quantitative easing (QE), which is expected to include bond buys of the larger Southern European economies (e.g., Spain and Italy), but could exclude smaller peripheral countries (Greece, along with Portugal and Cyprus).

Blinks – or “Grexit”?

The post-election drama will ensue if Syriza wins and it will start talks with the Troika. Tsipras has set the tone by saying that his government would cease to enforce the bailout demands “from its first day in office.” He is hoping that the Troika and Germany would blink and support Greece, despite Athens’s new policies. 

If, however, the Troika believes that if it would blink, that could unravel 2010-14 austerity policies and thus provide an incentive for other fragile economies in Southern Europe to bargain with the Troika.

In another scenario, the Troika would blink. In this case, Syria is expected to allow the dilution of its social policies, but not its pledge of an international debt conference. It would seek debt relief reminiscent of that granted to Germany in 1952 (62 percent). That would cut substantially the general government debt, which today exceeds 190 percent of the Greek GDP. 

But what if neither the Troika nor Syriza will blink? In that case, the Troika would hope escalating economic pressure to cause Syriza’s political collapse. In turn, Syriza would bet that the Troika would not dare to risk its post-2010 gains to marginalize Greece from the international community. Markets would be swept by new volatility and Athens would be forced to exit the Eurozone. Nevertheless, Brussels believes that Europe could absorb the shock associated with the “Grexit.”

Whatever the final scenario, the repercussions will be felt not just in Greece or the Eurozone, but worldwide.

Greek Elections, Euro Tension – and “Grexit”? is republished with permisson from Dr. Dan Steinbock