Monday, June 18, 2012

Election in Greece (2)

New Democracy has emerged as the front-runner to form a new government in Greece.  Anti-austerity Syriza has come in a close second with Pasok in third place.  This is the preferred outcome, at least from a financial market’s perspective.  It was the inconclusive first election along with the dominant position of Syrzia that led to heightened fears of an imminent Greek euro exit.

This second election saw a consolidation of support for the major parties, helped by their being around a dozen less parties to choose from on the ballot this time.  No party received over 20% of the vote in the first election.   This result is more in line with other polls suggesting a majority of Greek’s prefer to stay in the euro and a (smaller) majority want Greece to honour the commitments it made under the terms of the bailouts.

A Government still needs to be formed.   A New Democracy-Pasok coalition seems most likely.  Those two parties along with the 50 bonus seats awarded to New Democracy as the highest-polling party would command around 160 seats in the 300 seat parliament. 

There will still be calls for a renegotiation of the terms of the bailout.  In the run up to this second election, all three of the major parties adopted a “renegotiation” position.  The good news is the troika (EU, ECB and IMF) appear open to some tweaks.  After the first election we suggested some degree of pragmatism would inevitably have to prevail.  Indeed hints emerged last week that Greece would be offered lower interest rates on loans, longer repayment periods and EU financial support for public works programs in return for continued commitment to the terms of the bailout.

Coalition talks will most likely take some days.  In the meantime there is a G20 meeting scheduled this week and an EU Summit at the end of next week.  We need to remember the Greek election was just another hurdle in a very long steeplechase!

We expect the G20 to increase the rhetoric on encouraging Europe to get their house in order and to continue to work towards a more fulsome solution to Europe's sovereign debt and banking sector issues.  There may also be further financial commitment to the IMF’s bailout resources.

The EU summit scheduled for the end of this month will continue to address some of the weighty systemic issues such as the possible role for the ECB in Europe-wide bank supervision, deposit guarantees, euro bonds and the possible role of the European Stability Mechanism in being able to directly recapitalise banks.  Recall this was the problem with the Spain bank bailout.  The fact that the funds have to be channelled through the sovereign means that Spain’s debt to GDP ratio will rise.  That led to markets simply swapping their angst over the banks to the sovereign.

Germany is becoming isolated on some of these issues, with a block forming on the other side of the debate including France, Italy and the Netherlands.   Hollande (with a strong mandate following the socialists win in this weekend’s parliamentary elections) seems to be striking a positive rapport with Italian Prime Minister Mario Monti. 

It could be viewed that Europe is becoming increasingly fragmented on some of these issues.  I disagree; they were always fragmented on these issues - it's just they are now being openly talked about.  The good news is they are talking.